Share Dilution

Why it’s worth betting against TLRY stocks at this point

Cannabis business Tilray (NASDAQ:TLRY) is undeniably a disappointment. Meme traders sent TLRY shares to an unsustainable high of $ 67 in February. Since then, the action has continued to decline.

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As this Canadian cannabis company aims to expand into the United States, should the owners of its shares keep their shares?

The bearish outlook for TLRY stock

The the Wall Street newspaper reported last week that Tilray had made a plan to expand to the United States,. This is nothing new. Last year she merged with Aphria in an effort to facilitate aggressive politics expansion in the country.

The merger, however, was not a solution to Tilray’s underperformance, as both companies failed to capitalize on the legalization of cannabis in Canada.

In the United States, multi-state operators, or MSOs, dominate the cannabis markets. They are profitable and do not disperse. For example, Green Thumb, pioneer of the MSO model, has a presence in 14 states.

Meanwhile, Tilray has taken too much money from its investors. It obtained the approval of its investors to increase the number of authorized shares of its ordinary shares on September 10. CEO Irwin Simon said, “With the support of our shareholders, Tilray now has the resources we need to build on our momentum and execute our plans. “

This move, however, will hurt the owners of TLRY shares. The value of their shares will be diluted as the company purchases MSOs. Chances are, Tilray is paying too much for an American cannabis operator. Investors may consider buying the shares of MSOs, with the aim of guessing which companies Tilray can acquire.

The opportunity for legalization

Tilray is betting Congress will legalize cannabis across the United States, justifying the company’s plans to expand into the United States. Tilray CFO Carl Merton said The Wall Street Journal earlier this month, “We believe the United States is closer to legalization than ever, but the process will take time.”

Merton has an ambitious goal of $ 4 billion in revenue by the end of fiscal 2024 for Tilray. The goal assumes that Congress will legalize cannabis. But the United States will likely take longer than Tilray expects to legalize cannabis. As a result, the company will have to revise its forecasts downwards.

Tilray is confident that it will be able to significantly increase the turnover of its MedMen unit which it acquired in August. Tilray expects subsidiary to increase sales by at least $ 1 billion to $ 1.5 billion expanding to more US states But he will not be able to achieve this goal without full legalization in the United States.

Tilray can however develop in Europe. With the arrival of new administrations in Germany, Israel and Denmark, the chances of cannabis legalization by these countries will improve over the next 18 months.

In Portugal, Tilray has a high quality production tool. It also has a cultivation and production plant in Germany.

The risks of Tilray

Tilray’s net sales in the first quarter increased by 43% year over year to $ 168 million. Its net cannabis revenues jumped 38% to $ 70 million. While its adjusted gross margin was 43%, Tilray’s first quarter net loss increased to $ 34.6 million, from $ 21.7 million in the prior year period.

Tilray’s synergies with Aphria will reduce its costs. But the 43% year-on-year revenue growth was too slow to offset the 60% year-on-year increase in its losses.

During his first quarter earnings call, Merton, the chief financial officer, reported that the coronavirus had negatively impacted its results. Although the company’s business in Canada did not increase for many quarters, he still expressed optimism about improving its sales in Canada, citing the positive impact of vaccinations there.

But in this financial model which assumes modest growth, the TLRY share is worth less than $ 7.50 per share.

Most analysts are mixed on TLRY shares

On Wall Street, ten of the 13 analysts rate the action as “restrained”. Their average price target is around $ 15.00, according to Tips.

The company is still losing money. On the conference call, an analyst asked why the company is seeing a dilution of its actions as beneficiary. CFO Merton said there will be no dilution until the company uses the money for an acquisition or other purposes. Typically, stocks of companies that acquire other companies fall.

The bottom line

TLRY stock is on a downtrend for good reason. The markets expect the company to report more losses in the coming quarters. This will weigh negatively on its short-term outlook.

The company expects the US Congress to legalize cannabis. But if that happens, investors would be better off buying MSOs instead.

TLRY shares remain an unattractive investment.

As of the publication date, Chris Lau does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.


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