Regardless of whether you're willing to take on risk or not and whether you're willing to be patient and hold a stock for years, top Canadian cannabis retailer Tilray Brands (TLRY 1.71%) just isn't a company worth taking a chance on.
It has been an underperformer, and there's little reason to expect that will change anytime soon. Tilray's latest earnings results only solidify why this is an all-around bad buy. These are four reasons investors should avoid the stock right now.
1. More writedowns could be coming
Tilray reported its third-quarter earnings this month, and its net loss for the period ending Feb. 28 was a mammoth $1.2 billion. Much of that was due to several impairment charges, which totaled over $1.1 billion. The impairment charges were related to various assets, including goodwill. And with Tilray still carrying more than $2 billion on its books relating to goodwill, there's room for more potential impairment charges in the future. And as bad as Tilray's bottom line was this past quarter, there could still be worse ones to come.
2. Revenue growth has been non-existent
For growth-oriented investors, a big red flag is undoubtedly Tilray's top line. Quarterly revenue of $145.6 million was down 4% from the prior-year period. And it has been on a downward trend for multiple quarters:
TLRY Revenue (Quarterly YOY Growth) data by YCharts.
At this rate, it will be a challenge for the company to finish its fiscal year with higher revenue than the previous year. Over the past nine months, its net revenue of $442.9 million is down 7% from a year ago.
3. Its gross margin was negative last quarter
This past quarter, Tilray's gross margin was negative 8%. And even if the company were to improve from that, it's not likely that it would be strong enough for Tilray to turn a profit. Its three-year average is just under 18%:
TLRY Gross Profit Margin (Quarterly) data by YCharts.
Even if it achieved a gross profit margin of 32% (near its recent high), the company's gross profit this quarter would have totaled just $46.6 million. The company spent nearly that much on selling, general, and administrative expenses alone. That doesn't factor in other overhead and expenses, including amortization, marketing, and what other one-off costs (i.e., restructuring and impairment) the company seems to always incur. Profitability for Tilray is simply nowhere in sight as long as its gross margin remains abysmal.
4. It's acquiring and investing in bad companies
The worst reason to buy the stock is that Tilray consistently chooses bad companies to partner up with. I'm not a fan of its plan to acquire cannabis producer Hexo. While $56 million may not seem like a lot for one of the top Canadian cannabis companies, Tilray will fund the deal through shares, diluting investors in the process. And Hexo is not the force it was in the past; in the trailing 12 months it has incurred losses totaling 301 million Canadian dollars, and its revenue during that time has been CA$148.1 million. Its rate of growth has also been falling sharply:
HEXO Revenue (Quarterly YoY Growth) data by YCharts.
Another company that Tilray is eyeing is multi-state marijuana operator MedMen. It previously acquired the company's convertible debt with Tilray looking to potentially buy the business in the future (since pot isn't federally legal in the U.S., it would likely cause problems for Tilray if it wanted to do so today and remain listed on the Nasdaq). MedMen is another deeply troubled business, incurring losses of $132.9 million over the past 12 months. And there are concerns about its liquidity and its ability to pay its bills.
Tilray Brands isn't worth the trouble
Tilray Brands is an overly risky stock to buy. If you want exposure to the cannabis industry, there are plenty of other pot stocks to consider. And a safer option may be to not invest in a cannabis producer at all, especially with U.S. legalization not on the horizon anytime soon.
