Tilray Brands (TLRY 1.71%) stock was up 25% at its peak on July 26 before pulling back a bit after the company reported some smashing earnings for its fiscal fourth quarter of 2023 ended May 31. The results are a breath of fresh air for shareholders, who've seen the stock decline by 70% in the past three years.
But was Q4 a blip, or does it foreshadow further strengthening of this cannabis conglomerate that might support a case for buying the stock? Let's figure it out.
Why this company's fortunes are likely changing
Per its earnings release, Tilray's sales were $627 million for its 2023 fiscal year, down by $1 million from 2022. So its cannabis operations didn't exactly experience a bumper crop. Still, the larger context of the cannabis industry makes its lack of revenue growth excusable, for now. Last year and 2023 so far have been brutal for North American marijuana businesses as a result of a consumer market that's been swamped with inexpensive legal cannabis, which has kept prices low and put serious pressure on margins.
That period also saw Tilray's market share in its home market of Canada slump, though it retained its leading position. In July 2021 it held 14%, but by April of 2022 it had fallen to 10% despite management's ambitions plans to capture a third of the market. But now it's back to 13%, so a rebound is in progress, and further gains might be on the way.
Importantly, its gross margin is improving too, which means that its planned efficiency improvements are paying off. When paired with the eventual recovery of the average selling price of marijuana, it could make for a serious driver of further returns for investors. And once it actually starts generating free cash flow (FCF) on an adjusted basis -- which management thinks could happen in its 2024 fiscal year, which is now underway -- those returns could accelerate.
The turnaround isn't confirmed just yet
It's true that Tilray's progress with its market share and margins bodes well for its future. But this isn't a stock for the faint of heart. In 2022, it burned more than $211 million in cash, and it has around $206 million in cash and equivalents on hand. It's still deeply unprofitable. And major potential catalysts like cannabis legalization in the U.S. and E.U. have failed to materialize on the timetables that management had hoped. There's little indication that legalization in any of its target markets is happening soon.
Furthermore, its market share and profitability gains may be temporary. At least in Canada the market is saturated, which means that further top-line growth will require stealing customers from competitors. That implies Tilray will need to spend more on marketing, and it might also opt to continue acquiring smaller businesses. Both of those activities will deplete its cash reserves even more. So if it fails to start making cash from its operations over the next 12 months, something will need to give.
In the long term, Tilray remains well-positioned to flourish in North America as well as in the E.U., assuming it can survive the remaining bumps in its road to profitability. There might still be a lot of pain for people who buy the stock now, though. And there's no guarantee that it'll succeed, even with the benefit of time and the nascent marijuana market recovery.
Nonetheless, its Q4 results point to a distinct change in the balance of risks and potential rewards associated with an investment in Tilray stock. If it can do a repeat performance over the next few quarters to confirm that the positive results are a trend, it will be a strong signal to buy. But if you're daring, there's enough evidence to make a risky bet on it today.
