Tilray (TLRY) jumped on FQ2’22 results that somehow impressed the market. The cannabis L.P. actually reported declining cannabis revenues and a meager EBITDA profit after ignoring certain costs that are starting to recur. My investment thesis remains negative on the Canadian cannabis stock, as the company fails to grow cannabis revenues.
More Weak Cannabis Revenues
The stock ended up 13% as investors again misunderstood the reported 20% growth rates due to a full inclusion of the Aphria numbers this quarter. Not to mention, a lot of media outlets pointed to a surprise profit, but the adjusted EBITDA for the quarter was just $13.7 million, up from $12.7 million in the prior quarter. The L.P. has utilized $70 million in cost synergies from the Aphria deal in order to hold EBITDA profits flat in the face of weak revenues.
Tilray only generated $33 million in gross profits providing limited opportunity for true profits made by the business. In addition, the large cannabis operator again wrote down inventory to the tune of $12 million in the last quarter plus incurred another $8 million in transaction costs which along with ~$10 million in interest expenses would’ve led to a sizable loss from the business.
What remains most disappointing about the quarterly results is the actual lack of cannabis revenues and those amounts actually seeing sizable declines. For the quarter, cannabis net revenue was just $59 million, down from $70 million in the August quarter. Even the beverage and wellness revenues declined sequentially with revenues in both categories declining from $15 million per quarter to below $14 million. The only category growing was the virtually worthless distribution business in Germany with 11% gross profits.
The company ended the quarter with only $73 million in revenue from the crucial cannabis and beverage spaces and nearly $69 million from the distribution business. When excluding the distribution business, Tilray only reported revenues of $86 million in the quarter highlighting how the business has limited scale and continues to struggle.
CEO Irwin Simon continues to suggest a disconnect with the actual results with this statement to start the earnings release:
Our second quarter performance reflects notable success building high-quality and highly sought-after cannabis and lifestyle CPG brands which, coupled with our scale, operational excellence and broad global distribution, enabled us to increase sales and maintain profitability despite sector-specific and macro-economic headwinds.
The company has seen organic sales decline since closing the merger with Aphria. The limited gross profits and adjusted EBITDA profits would hardly highlight a position of profitability.
No chart better highlights the struggles for the combined entity than the declining revenue estimates. The FY24 revenue estimates peaked at nearly $1.4 billion back last August and the estimates were down below $1.1 billion before Tilray missed the FQ2’22 results by 10%.
Not Exactly Cheap
While the stock is down substantially from the meme peak in February and more specially the normalized levels mid-year, Tilray still isn’t exactly cheap. The stock has a valuation topping $3.5 billion now while the cannabis business can’t even grow with annualized revenues below $250 million now.
The company isn’t even forecast to produce $100 million in adjusted EBITDA next year, so a $3.5 billion valuation is massive. Tilray hasn’t even been able to grow due to the weak Canadian cannabis market.
The stock trades at over 40x actual EBITDA estimates while revenues are in sequential decline. The market still views Tilray as being in growth mode while the business has vastly failed to generate any growth in cannabis sales and the business is nearly 50% tied to a distribution business offering limited value.
Of course, the investment thesis is quickly shifting towards international medical cannabis where a country like Germany is in the process of opening up a multi-billion opportunity. Tilray claims 20% market share in the country and revenue from International cannabis products did jump to $14 million in the quarter, up from $10 million in the prior quarter.
The biggest question facing investors is whether a country like Germany will allow outsiders in Canada to capture the lion’s share of the market. Market forecasters predict the market will reach a size of up to $5 billion, similar to Canada, with an approval of recreational cannabis.
If Tilray can combine with another leading player within their home country and still only capture 10% of the market share, investors should be very skeptical on the share captured in a foreign country already allowing other countries to export medical cannabis to Germany. Not to mention, homegrown businesses are already attracting capital to supplant foreign competition per this NY Times article.
The key investors takeaway is that investors should continue to avoid Tilray. The market remains out of touch with the actual results at the Canadian cannabis company and the International cannabis opportunity is likely to trail expectations.