As the largest cannabis company in Canada and one of the biggest in the world, Tilray Brands (TLRY 2.29%) has a lot in its favor. With its quarterly revenue up by nearly 57% since mid 2019, its consistent progress in penetrating fresh markets will likely make it a relevant competitor for years to come.
Assuming it can ever address a few of its persistent bugbears, that is. In my view, investors should probably stay away from Tilray's stock for the moment, and here's why.
Image source: Getty Images.
1. It isn't consistently profitable
Though it's true that Tilray reported revenue of $152 million and net income of $52.4 million in the third quarter of its 2022 fiscal year (ended Feb. 28), investors shouldn't expect it to repeat the feat every quarter from here on out.
Tilray's operational efficiency has come a long way in the last three years as a result of realizing $76 million in cost synergies from its merger with Aphria in 2021. But it still leaves a lot to be desired, as shown below:
TLRY SG&A Expense (% of Quarterly Revenues) data by YCharts
As you can see, the company's total expenses have grown as a share of its quarterly revenue, led by a sharp multi-quarter rise in its selling, general, and administrative expenses. That's likely a consequence of its continued emphasis on expansion and leadership in lucrative European markets, like the medicinal cannabis market in Germany.
Of course, its cost of goods sold has fallen relative to sales, which could mean that its cultivation and processing operations have become more efficient. But fluctuations in the market value of the cannabis in its inventory could easily throw the favorable downtrend into reverse, as it did in mid-2020. And that would leave people who invested now vulnerable to the impact of the downturn, to say the least.
2. It might need to raise more cash soon
The second reason why it might be worth holding off on a purchase of Tilray stock is that it might soon need to take out new debt or issue new shares to keep the show going.
Consider this chart:
TLRY Cash and Equivalents (Quarterly) data by YCharts
In short, the current portion of its debt is rising as more notes become due, which means that it'll need to devote more of its funds toward payments. At the same time, it isn't generating any free cash flow and its liquid holdings are dwindling. None of that spells doom, but it does pose a threat that needs to be addressed at some point.
If Tilray's long-standing habit of issuing new shares to proactively shore up its cash reserves is any indication, management will prefer to dilute shareholders with a new stock offering sooner rather than later. And that might put a small dent in holders' portfolios.
3. It isn't well positioned for the U.S. market
Perhaps the largest and most important reason why you should avoid buying Tilray stock right now is that the business simply isn't prepared to take advantage of any breakthroughs in cannabis legalization in the U.S., which means that it might miss out on a lot of growth. Remember, it's a Canadian company, and its primary markets are currently Canada and the EU.
Its American subsidiaries include SweetWater Brewing, Breckenridge Distillery, and Manitoba Harvest, the first two of which are alcohol businesses. Manitoba Harvest, to its credit, at least sells hemp products -- but only for use as foodstuffs and nutritional supplements. Management contends that these business units "will expand in the near term into ... THC-based products upon legalization," but it hasn't provided any estimates about the anticipated timelines, costs, or benefits associated with doing so, which makes the plan a bit hard to believe in.
Similarly, Tilray's ownership of most of MedMen Enterprises' senior convertible debt notes means that it has the option to gain a major stake in a U.S.-based cannabis cultivator, should it be advantageous to do so. The trouble is, MedMen is deeply unprofitable.
So, if cannabis gets legalized in the U.S., Tilray won't be able to capture any of the growth without also taking on a money-losing investment. If you're thinking that such a move would prompt an even greater need to raise cash by issuing new shares or taking out fresh debt, you're probably correct. And that's yet another reason why it's probably better to hold off and wait for a better plan before making a purchase of this stock.
