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Marijuana stocks have been bleeding for a while now. The last 15 months have been an absolute bloodbath for cannabis investors. The optimism surrounding pot stocks before Canada legalized recreational marijuana seems a lifetime away.
Since then, pot stocks have been dragged down due to valuation concerns, rising competition, a flourishing black market, lower demand, health concerns over vape products, regulatory issues, and other structural issues coupled with the COVID-19 pandemic.
One such company that has burnt massive investor wealth is Tilray (NASDAQ: TLRY). Tilray stock went public back in July 2018 just before Canada legalized recreational pot. The stock then zoomed to its record high of $300 per share in intra-day trading on September 19, a staggering gain of 1,665% in just two months.
Currently, Tilray stock is trading at a price of $7.1 and is down close to 60% in 2020. Comparatively, the S&P 500 and NASDAQ have returned -6.4% and -1% respectively year-to-date.
In the past two months, several cannabis companies are staging a comeback. Pot stocks are focused on lowering costs, exiting unprofitable businesses, and improving profit margins to stay afloat. Let’s take a look if Tilray can follow the course and beat the broader markets in the second half of 2020.
Tilray’s international sales were up 200% in Q1
Tilray is one of the leading pot players in the world. It is engaged in the research, cultivation, production, and distribution of medical cannabis and cannabinoids. It was the first licensed producer to have its GMP (Good Manufacturing Practices) certified in accordance with EMA (European Medicine Agency) standards. This diversified cannabis cultivator has operations in 15 countries. It also sells hemp in 20 countries via a network of 17,000 retailers.
In the first quarter of 2020, Tilray sales were up 126% year-over-year at $52.1 million. Its international medical marijuana revenue jumped 221% while sales from Canada’s adult-use business rose 165%. Its cannabis sales rose 76.3% while hemp sales were up 282% in Q1.
In the March quarter, Tilray generated 57% of sales from Canada, 31.7% of sales from the U.S., and the rest from international markets. Its diversified business makes the stock an attractive bet, given its market presence in the medical marijuana space.
Tilray continues to benefit from its acquisition of Manitoba Harvest in March 2019. Manitoba provided Tilray entry into the high growth hemp market in the U.S. as well as a network of 17,000 retail stores in North America. Hemp sales accounted for 41% of sales, compared to just 24% in the first quarter of 2019.
Another key driver for Tilray’s top-line in 2020 will be the launch of Cannabis 2.0 products. It was one of the first major players to introduce cannabis-infused edibles in Canada and also launched a joint venture in partnership with beverage giant Anheuser-Busch InBev (NYSE:BUD) to gain traction in this space.
Tilray’s balance sheet raises concerns
Similar to most pot stocks, investors were concerned over the precarious cash position of Tilray. It ended 2019 with cash of just $97 million, compared to a balance of $517.6 million in 2018. In the first quarter, the pot company raised a total of $145 million in debt ($60 million) and equity ($85.3 million) capital.
This increased its cash position to $194.07 million at the end of Q1 and it expects to spend around $115 million in cash flow for 2020. While its hemp sales have increased multifold in the recent quarters, it is a low margin product. Tilray has to improve profit margins in order to avoid further shareholder dilution.
What next for Tilray investors?
The global cannabis is still in a nascent stage of growth. However, it has also attracted several players thereby increasing competition. Tilray’s profit margins are unhealthy which has resulted in significant shareholder dilution and wealth erosion for investors.
Tilray stock will remain volatile until the company can successfully improve the bottom-line in the upcoming months.
Related: 3 Tech Stocks That Are Beating the COVID-19 Bear Market
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