Canadian Cannabis Company is down 20% Year To Date: Is it Too Cheap to Ignore?

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Written By Jackson Hartwell

Tilray Brands has experienced a significant decline, dropping 20% since the start of 2024 and losing nearly 90% of its valuation over the last three years. Despite this, TLRY’s market cap remains high at $1.53 billion, significantly surpassing its competitors such as Canopy Growth (CGC) and Aurora Cannabis (ACB).

TLRY’s investment appeal lies in its diversified business model, with its beverage alcohol segment showing substantial growth, offsetting the continued decline in its cannabis distribution segment.

Performance Overview

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In its fiscal 2024 third quarter, Tilray reported total revenue of $188.3 million, marking a 29.3% increase year-over-year but missing analyst expectations by $10.03 million. The quarter, which ended on February 29, 2024, saw notable growth in beverage alcohol net revenue, which surged by 165% year-over-year to $54.7 million.

This segment is on track to become TLRY’s largest revenue driver. However, the distribution segment saw a 13.15% decline to $56.8 million, while cannabis net revenue grew by 33% to $63.4 million. Despite these gains, TLRY recorded a net loss of $92.7 million, with cash and cash equivalents falling to $225.86 million from $448.52 million in May 2023.

Financial Health

Tilray’s financial health is under pressure due to significant cash burn and reliance on dilution to maintain operations. The company’s diluted weighted average number of common shares reached 754,439,331 in Q3, up 259% over the past five years, reflecting an annual dilution rate of 51.8%.

This trend is set to continue with the recent filing for the sale of up to $250 million in shares through an at-the-market equity program, adding further selling pressure on its stock.

Free cash burn for the third quarter was approximately $24.89 million, an improvement from pre-pandemic levels thanks to cost-saving measures.

The integration of HEXO contributed to $15.6 million in annualized cost savings during Q3. TLRY plans to close its Cayuga facility, sell its Masson facility in Quebec, and its Belleville beverage facility in Ontario to further streamline operations and drive $70 million to $85 million to Canadian cash flow, improving net income by $5 million to $7 million annually.

Challenges and Opportunities

Tilray’s gross profit for Q3 was $49.4 million, with gross profit margins steady at 26.23% over the past five years. However, the company faces challenges with a substantial total debt of $481.6 million at the end of Q3, partially mitigated by a $19.8 million debt-for-equity swap deal.

The reclassification of cannabis from a Schedule I to a Schedule III drug in the US represents a significant opportunity. This change, proposed by the US Department of Justice, could broaden financial services access for cannabis firms and allow them to take standard tax deductions. The primary benefit for TLRY would be the potential for broader US federal legalization.

Valuation and Outlook

Tilray currently trades at a 1.85x multiple to trailing 12-month sales, a sharp decline from 18x a year ago. This drop comes amid expectations of US reclassification of cannabis, which would be a milestone for the industry.

Despite the challenges, TLRY’s beverage-alcohol business is a bright spot, showing robust growth. However, the company’s history of intense dilution, absence of profits, and positive free cash flow make it a risky investment.

Proceed With Caution

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Tilray Brands remains a prominent player in the cannabis industry, with a diversified business model that includes a rapidly growing beverage alcohol segment. However, its significant cash burn, reliance on dilution, and ongoing net losses present substantial risks.

While the potential reclassification of cannabis in the US offers hope for future growth and profitability, the company’s current financial challenges and high market cap compared to peers make it a cautious investment. Investors should weigh these factors carefully before considering a position in TLRY.


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