In its earlier stages, the pot industry was all about growth. But now, as investors have become more concerned with cash flow, companies are also focusing on improving their bottom lines and staying out of the red. The latest cannabis company to turn a profit was Tilray (TLRY), achieving that mark earlier than both Aurora Cannabis (ACB -0.38%) and Canopy Growth (CGC -0.89%).
But does that mean Tilray is a safer business or that it is in better shape than those two companies? Let's take a look at what changed for Tilray this quarter and whether it is a better buy than two of its key rivals.
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Tilray comes through on its promise -- but should investors be impressed?
On Nov. 9, when Tilray posted its third-quarter earnings, the company's CEO, Brendan Kennedy, projected that in the next period, the company would hit positive adjusted EBITDA. While that technically isn't true accounting net income, it has become the benchmark for cannabis companies when talking about profitability. Either way, Tilray followed through on its promise on Feb. 17, posting fourth-quarter results that featured an adjusted EBITDA profit of $2.2 million. That was an improvement from Q3 and its loss of $1.5 million.
Tilray's overall net loss in Q3, at $2.3 million, was actually lower than the $2.9 million loss it posted this past period. The company simply reclassified more expenses out of its adjusted EBITDA than it did in Q3. That doesn't mean those weren't legitimate changes, but it does mean there was more noise. The problem is that since adjusted EBITDA is a non-GAAP (adjusted) number, it can be difficult to compare one company to another on this basis.
This is part of the reason I prefer to look further up the income statement at operating income instead. Since it comes before all the non-operating items show up, it can give investors a better picture of how a company actually performed during the period at an operational level. And in Q4, Tilray's operating loss totaled $21.3 million -- which was a significant improvement from the $32.8 million loss it reported in Q3.
In short, while Tilray did post a profit on an adjusted EBITDA basis, it wasn't by much and there are no guarantees it will continue. For example, some of the items included in the adjusted calculation were changes in fair value, gains, and losses due to foreign exchange and equity investments. These items aren't easy for a company to forecast, and that's why simply achieving positive adjusted EBITDA doesn't mean the company will continue to stay out of the red.
Why do Aurora and Canopy continue to struggle?
Canopy Growth released its most recent results Feb. 9, and for the third quarter ending Dec. 31, its adjusted EBITDA loss totaled 68.4 million Canadian dollars. Management expects that number to become positive next year, but it will be a tall order given the company's reported operating loss of CA$553.6 million in Q3. A big problem is its gross margin, which at CA$24.6 million was just 16% of its top line -- not enough to cover its selling, general, and administrative expenses of CA$144.1 million, let alone the rest of its operating costs. By comparison, Tilray's gross margin sits at just under 30%.
A few days later, on Feb. 11, it was Aurora's turn to posit its second-quarter results, and its adjusted EBITDA loss of CA$16.8 million was a lot closer to breakeven. Aurora does have a bit of a better gross margin at 26%, but the company is also bloated with expenses. In the second quarter, its operating expenses of CA$64.4 million were nearly as high as its net revenue of CA$67.7 million. However, the company anticipates that expenses will come down as it has made reductions to headcount, which should help improve its prospects for profitability in the near future.
Is Tilray the better buy?
Hitting positive adjusted EBITDA is great for Tilray -- but it isn't a reason to invest in the stock. Future quarters could be volatile, especially as the company continues its merger with Aphria, which will mean more costs to trim and redundancies to eliminate. The merger will, however, make the business better over the long term; Aphria is a low-cost producer that has posted seven straight profitable (adjusted EBITDA) quarters.
While Aurora and Canopy may reach breakeven soon, that's by no means a guarantee. Given the risk in the cannabis industry, I would go with more of a sure thing -- and today, that's Tilray.
