Shares of Tilray (NASDAQ:TLRY) stock are likely to start trading sharply lower after an earnings report that showed continued weakness in cannabis demand. Prior to the market open, TLRY stock is down over 10%. That puts its yearly decline at nearly 56% for the year. The S&P 500 Index, SPX, is up nearly 5%.
For the quarter ending on June 30, 2020, Tilray reported negative earnings per share of 65 cents which was far off the consensus expectation of negative 27 cents per share.
Revenue was also a miss. The $50.4 million posted by Tilray was shy of the $54.99 that analysts were projecting. Tilray management cited “pantry loading” in March as the reason for the quarterly decline in revenue. Additionally, the company was still dealing with the effect of store closures and other disruptions in the retail channel.
Tilray’s report came after Canopy Growth (NYSE:CGC) had reported strong earnings in the morning. This was perceived as a sign that perhaps the industry was turning the corner. But in fact, it may be a simple fact that Canopy is in a better position to weather the current conditions in the cannabis sector.
One step forward, one step back
Investors had to be disappointed with Tilray’s results because of the strong performance the company showed in its first-quarter earnings in March. At the time, the company posted a year-over-year revenue gain of over 100%.
But this time around the story was different. The $50.4 million in revenue was approximately 10% higher than the $45.9 million posted in the same quarter in 2019. But it was lower than the first quarter number of $52.2 million.
Prior to the fourth quarter of 2019, Tilray had managed to increase revenue in each of the prior five quarters. Since then, they’ve come in lower in two out of three reports.
In terms of earnings, the picture doesn’t look any better. The company is still not profitable and analysts don’t forecast profitability to be coming anytime soon.
Adult-use remains solid, but not spectacular
One of the key metrics that investors are looking at is adult recreational use. Tilray reported that the category made up 58% of its revenue in the second quarter. This was unchanged from the same period the year before. Tilray is seeing the acceptance of its cannabis 2.0 products which accounted for approximately 22% of adult-use sales.
Adult-use cannabis is the low-hanging fruit of the industry. It’s also going to be the most competitive, and therefore toughest to achieve meaningful gains in market share. And that’s why with Tilray you have to look a little deeper.
Tilray has always been a little different
If you’re looking for a bright spot in Tilray’s report, you can look at their medical marijuana sales. The company saw a 65% growth in sales from Canada Medical. This went along with a 349% growth in international medical. As a percent of sales, Canada Medical was 13% of revenue (as opposed to 9% at the same quarter in 2019) and international medical is now 28% of revenue (higher than the 7% it was in the same period for 2019).
Those two areas combined made up $12.1 million of the company’s revenue for the quarter. This made it two straight quarters that international revenue for its medicinal marijuana segment outpaced Canadian revenue.
For those that are so inclined, that would be evidence of the company’s diversification strategy working. Tilray has been focusing most of its efforts outside of Canada. This is to take advantage of markets that are in the words of CEO Brendan Kennedy “orders of magnitude” larger than Canada. This was a key reason behind the company’s purchase of Manitoba Harvest. Manitoba is the world’s largest hemp food company, which gives Tilray a strategic advantage in the U.S. hemp market.
Taking a narrower, but potentially more profitable path
On the earnings call, Kennedy shared Tilray’s internal forecast that an additional 40 countries will legalize medical cannabis in the next 36 months. Additionally, Tilray believes 4 countries will take serious steps towards legalizing adult use cannabis. Of course, the United States remains the industry’s white whale, and all Tilray would say to that end, is that the election will be pivotal to the likelihood of legalization.
I remain bullish on the long-term narrative for cannabis. But the reason for that bullish position is because of the medical applications. With the world coming to grips with the stark reality of opioid addiction, cannabis has a real opportunity. Already, CBD products are capturing at least the minds, if not the wallets, of many Americans.
Rather than slugging it out for the recreational share, the medical marijuana path seems to be the most profitable track for Tilray. As a speculative opportunity for the risk-tolerant investor, Tilray looks like a buy on the dip candidate.
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