With its shares falling by 21% in the last 30 days, Tilray Brands (TLRY 2.74%) is actually looking a bit more appealing than earlier in the year. The multinational marijuana and beer company's latest fundraising activities, while detrimental to its share price in the short term, could be what it takes to make it thrive in the longer term.
And its valuation is now even lower than before. It isn't anywhere near being a no-brainer buy just yet, and it's still a gamble to invest in. Still, things could be looking up, which might be favorable for shareholders.
NASDAQ: TLRY
Key Data Points
Raising capital and refinancing debt can't be all bad
The culprit for Tilray's stock cratering is its announcement on May 26 that it is issuing $150 million of unsecured convertible senior notes. You can think of the action as taking out fresh debt that can be exchanged for shares of its stock before a certain deadline. In this case, the notes are due in 2027, and they're being issued at an interest rate of 5.2%, which is surprisingly decent given the company's long-term debt load of $312.5 million as of its most recent quarter.
At the same time as it announced the debt issuance, the company also repurchased $12.5 million of its debt due in 2023, and $122.5 million of its debt due in 2024. The notes, payable in 2024, have an interest rate of 5.25%. That means the company effectively used the new debt offering to refinance a large bulk of its near-term debt to a slightly more favorable interest rate.
The move will also grant somewhere between $15 million and $37 million in cash, depending on whether the debt's underwriters exercise their option to buy additional notes on top of the offer's initial pricing. Shareholders will know exactly how much actual cash the offering raised on or after May 31, when it's slated to close.
At first glance, the market's reaction to the offering's pricing announcement seems a bit overblown, but it's mostly due to the way the offering's math works out. Tilray's market capitalization as of May 24 was nearly $1.5 billion. If all of the new debt is converted into shares by the note-holders as soon as it's contractually possible to do so, it's equivalent to issuing new shares that would dilute shareholders to the tune of 10%. And that's before even taking the impact of the notes paying interest twice per year for four years into account.
So it makes sense why Tilray's stock tanked. But for those on the sidelines considering a purchase, it's hard to see how the new debt issuance is a negative. Its interest payments for the next four years are going to be a bit lower, so there will be more money to invest in growth. And as of the fiscal third quarter, its most recent, it had $408 million in cash, equivalents, and short-term investments, and its trailing-12-month operating expenses were $357 million.
This suggests that picking up an extra bit of cash buffer will be meaningful. After all, there's less chance that management could be forced to liquidate some of its short-term marketable investments at a loss to pay the bills if there's some more hard cash on hand.
The market's pessimism might be an opportunity
It's important to note that despite the beneficial medium-term impact of the new debt, the market doesn't have Tilray entirely wrong. The business has been consistently unprofitable for the last five years, and burning cash for practically every single quarter along the way.
While its efforts to scale its marijuana operations globally have required a lot of consistent investment, its quarterly revenue only rose by 28% in the last three years, reaching $145 million. And since the recent collapse of the Canadian marijuana market due to too much cannabis chasing too few customers, its home market outlook has been dire.
Still, it isn't about to go out of business this year or next -- and its shares are dirt cheap. Its price-to-book (P/B) ratio is 0.4, which suggests that the stock is trading for a lower price than the value of its assets. For bargain hunters, that valuation could be part of a decent investing thesis for a potential turnaround.
But don't go running to buy this stock simply because it was able to refinance some of its debt and the market reacted sharply. Tilray hasn't yet demonstrated the consistent improvements to its gross margin that would be indicative of a turnaround. Keep an eye on its next few quarters, though. If profitability and top-line growth start to pick up, it'll make the bargain look a lot sweeter, perhaps enough to act on.
