It’s usually not a good sign when companies announce that their annual revenue projections need to be revised downwards Tilray brands (NASDAQ:TLRY) The company did this with its third quarter results on April 9. However, there have been a number of important developments since then that could go some way to easing the bitterness that shareholders may be experiencing.
Despite the setback with progress against management’s previous guidance, there is still reason to believe this multinational marijuana and alcohol player could achieve its ambitions. So let’s take a look at what’s going on with its financial performance and why it’s probably too early to lose all hope.
The situation is a little more bearish than it seems
When companies report earnings, investors can always see what they want to see (that conditions are ripe for a stock price increase) and avoid any blemishes or storm clouds on the horizon. And if you read Tilray’s latest fiscal third quarter earnings report, there are plenty of green flags to focus on.
Perhaps the biggest positive sign is that revenue increased 30% to more than $188 million, with strong sales performance in its two core segments: cannabis and beverage. The recent acquisition of a handful of US craft beer brands is already driving growth, with alcohol sales bringing in $55 million after increasing 165%. Now alcohol is almost as big a segment as marijuana, which brought in about $63 million this quarter.
So it’s safe to say that the company’s revenue base is much more diversified than it was a few years ago.
Another bright spot was cannabis market share in the corporate home market of Canada. Although the stock fell to the high single digits for a time, it now owns 11.6% of the market. That’s why the company is gaining ground against its local competitors, all of which are now smaller than Tilray.
Then there are the ongoing changes to US marijuana policy announced in mid-May that could work to the company’s advantage in the long run. The Justice Department is working to reschedule marijuana from Schedule I to Schedule III, a somewhat more permissive schedule for the industry’s medical market players.
But that’s where the recent substantive good news starts to give way to the problems that management would probably rather avoid.
Company executives no longer expect it to report positive adjusted free cash flow (FCF) for fiscal 2024, which is now in its final stages. The stated reason for coming up short is “delayed timing for cash collection on various asset sales.” No comments were made about what might happen in the 2025 budget year.
Let’s analyze this information.
At some point, Tilray chose to sell some assets. These assets cannot be sold more than once because the company will no longer own them after the sale. The assets also cannot be used to produce value.
Thus, it appears that the plan to produce year-adjusted free cash flow would not inherently have led to a state of sustained cash flow generation, even if it had worked as intended. Operating losses exceeded $82 million, meaning the company is nowhere near consistent cash generation. And again, management hasn’t tried to reassure investors by claiming better times lie ahead.
The takeaway here is not bullish, to say the least.
Wait for the dust to settle
Given the above, there is no compelling reason to buy Tilray shares today. It doesn’t appear that the path to consistently reporting positive cash flows is free of obstacles.
Investors should also not take heart from higher sales figures, at least for the time being. While the bit about market share recovery compared to recent years is indeed a good sign, at this point every additional bite of market share simply means this company is burning cash faster. Achieving operational profitability has long been an issue, and it appears that it will remain so for even longer than leadership originally anticipated.
While it is still possible that it will achieve its strategic ambitions to have the largest cannabis footprint in the world, and it may still find a way to salvage its plans to enter the US cannabis market in the event of marijuana legalization, investors now need more than just the occasional whiff of green shoots and promises from management before committing their capital. The plan to launch an at-the-market (ATM) equity offering program for a total of up to $250 million will provide some of the liquidity it needs to ease access to the US market, but it will also dilute the shareholders.
Even though the company’s EU operations could make it a leader if regulations loosen, there is currently not enough evidence that future advantage is actually within reach.
Check back in a few quarters to see if Tilray’s operating picture has improved. Keep in mind that if the country cannot generate enough cash, it will be the shareholders who will pick up the tab through issuing new shares and eroding returns on debt financing. Until then, don’t buy it unless you have a very high risk tolerance and aren’t afraid of losing your money.
Should You Invest $1,000 in Tilray Brands Now?
Consider the following before purchasing shares in Tilray Brands:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Tilray Brands wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $652,342!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 13, 2024
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
Tilray Brands has lowered its guidelines. Is the stock a buy? was originally published by The Motley Fool
