Canadian cannabis company Tilray Brands (TLRY 1.71%) has been on the right track ever since it merged with rival Aphria in 2021. From an operational standpoint, it had been consistently profitable. However, industry headwinds such as excess supply, intense competition, and regulatory hurdles have hurt its business over the past few quarters.
It takes time for a big merger to reveal its full potential. Tilray is gradually becoming the bigger and better company that the merger aimed to create. Its fourth-quarter and full fiscal year (ended May 31) results are a testimony to that. Since reporting outstanding results on July 26, the stock has risen 24%, as of this writing.
Let's delve a little deeper into whether Tilray is a good buy now.
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Green flag: Tilray's global exposure could be a catalyst for growth
Like most Canadian cannabis companies, Tilray has struggled to increase revenue in recent quarters. However, its net revenue increased by a whopping 20% year over year to $184 million in Q4 fiscal 2023. Cannabis net revenue grew by 21% year over year. But alcoholic beverage net revenue was the winner, with a jump of 43% year over year to $32.4 million.
Tilray's smart growth strategies of acquiring SweetWater Brewing, Breckenridge Distillery, and Montauk Brewing are paying off. With these acquisitions, management hopes to expand in the U.S. market upon federal legalization of cannabis.
Tilray has maintained its market position in Canada and expanded into U.S. markets under the strong leadership of Chief Executive Officer Irwin Simon. It also has a lot of potential in Europe, where cannabis legalization is spreading. Because of Aphria's presence in the European market before the merger, it is well positioned in Portugal and Germany. This year, it also expanded into Italy, Poland, and the Czech Republic.
It derives a sizable portion of its distribution revenue from its German subsidiary, CC Pharma; in fiscal Q4, revenue increased by 19% year on year to $73 million. Tilray booked adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increase of 93% to $22 million in the quarter -- its 17th consecutive quarter of positive adjusted EBITDA.
At the end of the quarter, it had $206 million in cash and marketable securities and $24 million in long-term debt. It generated $43 million in adjusted free cash flow in Q4, compared with a negative cash flow of $24 million in the same quarter last year. In 2024, management hopes to be cash flow positive. This should help the company reduce its debt and plan any future acquisitions.
Red flag: Profitability is still a challenge for Tilray
Though Tilray has been consistently profitable from an operational standpoint, EBITDA is not a true measure of profit. Tilray still needs to increase revenue and generate a net profit. In the fourth quarter, it had a net loss of $119 million.
Depending on the American cannabis market to drive growth is no longer an option, as management discussed during the earnings call. According to CEO Simon, the company is focused on diversifying beyond the cannabis sector and is not reliant on U.S. federal legalization.
Furthermore, legalization in the U.S. may be a long shot. Domestic companies with a stronger hold on the U.S. market will benefit first when that happens.
For now, Tilray might want to focus on the Canadian and European cannabis markets to achieve profitability. Its position in these markets has already been strengthened.
Tilray is still a risky stock, but the green flag outweighs the red flag here. Strong fundamentals, a global footprint, wise leadership, and smart growth strategies could help the company become profitable. Tilray could be one of the best cannabis stocks to invest in right now for investors with higher risk tolerance and a long-term outlook.
