Shares of Canadian cannabis producer Tilray (TSX:TLRY) have been quite volatile this week. After rising 40% on Tuesday, they fell 18% yesterday, valuing the company at a market cap of $2 billion.
Several cannabis stocks, including Canopy Growth, Cronos, and SNDL, gained significant momentum on Tuesday after the U.S. Drug Enforcement Agency (DEA) announced its intention to reschedule marijuana as a Schedule III drug. Since 1971, marijuana has been classified as a Schedule I drug even though medical marijuana is legalized in more than 35 states south of the border.
Investors should understand that rescheduling the drug doesn’t make it legal at the federal level. In fact, the White House Office of Management and Budget still has to approve the recommendation for the rescheduling to pass.
But is the battle over for licensed marijuana producers in Canada who are looking to enter the world’s largest pot market to boost sales and profit margins? Earlier this year, Tilray chief executive officer Simon Irwin told The Wall Street Journal that the company would actively seek to enter the U.S. once marijuana is rescheduled, either organically or by targeting acquisitions.
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Tilray stock is fundamentally weak
In the fiscal third quarter (Q3) of 2024 (ended in February), Tilray reported revenue of US$188.3 million, an increase of 30% year over year but below estimates of US$198.3 million. However, it reported break-even non-GAAP (generally accepted accounting principles) in Q3, compared to estimates of a loss of US$0.05 per share.
Tilray’s top-line growth was driven by acquisitions. In late 2023, Tilray acquired multiple beer brands from Ab InBev, allowing its alcohol beverage business to almost triple sales year over year to US$54.7 million. Comparatively, Tilray’s acquisition of Hexo and Truss last year helped it increase cannabis sales by 33% to $63.4 million in the last quarter.
Simon stated, “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.”
The marijuana producer’s growth was partially offset by lower distribution sales, which fell 13% to $56.8 million due to a change in regulations regarding rebates and technical infrastructure outages.
Investors were concerned with Tilray’s lower outlook for fiscal 2024 (ending in May). The company expects adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) between US$60 million and US$63 million, which is lower than its previous mid-point estimate of US$73 million.
Tilray also claimed it would report a positive free cash flow by the end of 2024, but it has since withdrawn this forecast. Canada’s leading marijuana producer explained that the delayed timing of cash collections on asset sales has hampered its cash flow-generating ability in recent months.
What is the target price for TLRY stock?
Shares of Tilray are down over 95% from all-time highs, and it is still a risky buy for investors. Analysts tracking the TSX cannabis stock expect revenue to rise from US$627 million in fiscal 2023 to US$869 million in 2025. Comparatively, losses per share are forecast to narrow from US$2.35 in 2023 to US$0.1 per share in 2025.
Analysts remain bullish and expect TLRY stock to gain over 15% in the next 12 months. Given recent developments in the U.S., Tilray’s long-term thesis has just improved, and it may seem an interesting buy for those with a high-risk appetite.
