It’s usually not a good sign when companies announce that their annual profit forecasts need to be adjusted downward, as Tilray Brands (NASDAQ:TLRY) did with its third quarter results on April 9. Since then, however, a few important developments have occurred that could alleviate some of the bitterness shareholders might be feeling.
Despite the setback in its progress compared to management’s past guidance, there is still reason to believe that this multinational marijuana and alcohol player could live up to its ambitions. So let’s explore what’s going on with its financial performance and why it’s probably a little too early to give up hope.
The situation is slightly more bearish than it seems
When companies report earnings, it’s still possible for investors to see what they want to see – that conditions are right for the stock to rise – and avoid seeing any blemishes or clouds. storm on the horizon. And if you read Tilray’s latest earnings report for its fiscal third quarter, you’ll find plenty of red flags to focus on.
Perhaps the most positive sign is that its revenues increased 30% to more than $188 million, with strong sales performance in its two main segments: cannabis and alcohol. Its recent acquisition of a handful of American craft beer brands is already driving growth, with alcohol sales bringing in $55 million after surging 165%. Today, alcohol is almost as big a segment as marijuana, which brought in about $63 million during the quarter.
So it’s safe to say that the company’s revenue base is much more diverse than it was just a few years ago.
Another positive point was cannabis market share in the company’s home market of Canada. While its share had fallen to a high single-digit percentage for a while, it now holds 11.6% of the market. The company is thus gaining ground against its local competitors, all of which are now smaller than Tilray.
Then there are the ongoing changes to U.S. marijuana policy, announced in mid-May, which could work in the company’s favor in the long run. The Justice Department is working to reclassify marijuana from Schedule I to Schedule III, a somewhat more permissive listing for the industry’s medical market players.
But this is where the recent substantial good news begins to give way to problems that management would probably prefer to avoid.
Company executives no longer expect them to report positive adjusted results free cash flow (FCF) for its 2024 financial year, which is now in its home stretch. The reason given for this short situation is “a delay in the timing of collecting liquidity on various asset sales”. There was no comment on what might happen in its 2025 fiscal year.
Let’s analyze this information.
At one point, Tilray chose to sell certain assets. These assets cannot be sold more than once, because the company will no longer own them after the sale. Assets also cannot be leveraged to produce value.
So it appears that the plan to produce adjusted FCF for the year would not have led to continued cash generation in itself, even if it had worked as intended. Its operating losses totaled more than $82 million, meaning it is far from achieving consistent cash generation. And I repeat, management did not try to reassure investors that better times were ahead.
The takeaway here is not optimistic, to say the least.
Wait for the dust to settle
Given the above, there is no compelling reason to buy Tilray stock today. It does not appear that the path to consistently reporting positive cash flow is free of obstacles.
Investors shouldn’t rejoice in rising sales figures either, at least for now. While regaining market share from previous years is indeed a good sign, right now, every additional market share simply leads to this company burning through cash faster. Achieving operational profitability is a long-standing problem, and from the looks of it, it will remain so for even longer than executives initially anticipated.
Although it is still possible that it will realize its strategic ambitions to have the largest cannabis footprint in the world, and could still potentially find a way to salvage its plans to enter the US cannabis market by In the event of marijuana legalization, investors now need more than just an occasional hint of green shoots and promises from management before committing their capital. Its plan to launch an at-market share offering (ATM) program totaling up to $250 million will provide some of the liquidity it needs to make entry into the U.S. market a little easier, but it will also dilute shareholders.
Likewise, while the company’s operations in the EU could make it a leader there if regulations become more permissive, there is currently insufficient evidence that the upside prospects are actually at hand.
Check back in a few quarters to see if Tilray’s operational situation has improved. Remember, if the company fails to generate enough cash, it’s shareholders who will foot the bill through issuing new shares and debt financing that erodes returns. Until then, only buy it if you have a very high risk tolerance and are not afraid of losing your money.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Mad Motley has a disclosure policy.
Tilray Brands has narrowed its guidance. Is the stock a buy? was originally published by The Motley Fool
