Is Tilray Stock a Buy in the New Bullish Market?

Canadian cannabis producer Tilray has underperformed the broader markets in the last five years due to its weak fundamentals.

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Similar to other Canadian cannabis stocks, Tilray (TSX:TLRY) has taken investors on a roller-coaster ride. Shares of the company went public in July 2018, just before Canada legalized cannabis for recreational use. The stock surged from less than US$30 in July 2018 to over US$150 in October 2018. Today, it trades at US$1.72 per share and is valued at a market cap of roughly US$1 billion.

The Canadian cannabis sector is wrestling with industry-wide headwinds such as an oversupply of products, competition from new entrants as well as from illegal sales, overvalued acquisitions, and much more.

Moreover, these structural issues have made it impossible for Tilray and its peers to report consistent profits. To support their cash-burn rates, licensed cannabis producers in the country have been forced to raise equity capital several times, resulting in extensive dilution of shareholder wealth.

Given these factors, let’s see if Tilray stock can recover in 2024.

Tilray reported disappointing Q3 results

In the fiscal third quarter (Q3) of 2024 (ended in February), Tilray reported revenue of US$188.3 million and breakeven adjusted earnings. Comparatively, analysts expected Tilray to report an adjusted loss of US$0.05 per share with revenue of US$198.3 million in Q3.

Tilray’s sales in the quarter surged by 30% year over year on the back of acquisitions. The key driver of sales was the beverage-alcohol segment, which almost tripled year over year to US$54.7 million. Tilray acquired several big brands from AB InBev in 2023, allowing it to grow revenue in this business. Comparatively, marijuana sales ticked higher by 33% to US$63.4 million due to Tilray’s acquisitions of HEXO and Truss in the last year.

Tilray’s growth was offset by weak distribution revenue, which fell by 13% to US$56.8 million in Q3. According to Tilray, changing rebate regulations and IT infrastructure outages impacted distribution sales in the February quarter.

During the earnings call, Tilray’s chairman and chief executive officer Irwin Simon emphasized, “Over the past several years, our playbook of expanding our cannabis business to complementary markets such as beverages and hemp-based consumer products has positioned us well to navigate the current environment and to benefit from future growth opportunities.”

Will Tilray turn profitable in fiscal 2024?

Investors were concerned after Tilray reduced its outlook for fiscal 2024. It forecasts adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) between US$60 million and US$63 million in fiscal 2024, lower than initial estimates of between US$68 million and US$78 million.

Moreover, a positive EBITDA did not translate to free cash flow, which is a more reliable measure of profitability. Tilray claimed the timing of cash inflows on asset sales negatively impacted free cash flow in fiscal 2024.

Tilray continues to be unprofitable. In the last three quarters, it burned through more than US$60 million to run its operations, higher than the US$35.7 million it burned in the year-ago period. A negative operating cash flow indicates the company does not have the flexibility to reinvest in capital expenditures or repay its creditors.

Analysts remain bullish on TLRY stock and expect it to surge over 30% in the next 12 months. However, I would avoid investing in the cannabis giant due to weak fundamentals and negative profit margins.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.

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