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Tilray Rebounded in Q1, Most Analysts Recommend a ‘Hold’

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After underperforming its peers and cannabis ETFs in the first quarter, Tilray (NASDAQ:TLRY) stock has seen upward momentum in the current quarter. Quarter-to-date, Tilray traded 24.4% higher compared to an increase of 19.8% in the ETFMG Alternative Harvest ETF (NYSE:MJ). During the same period, Canopy Growth (TSE:WEED), Aurora Cannabis (NYSE:ACB), and HEXO (TSE:HEXO) have returned 14.0%, 19.7%, and -8.7%, respectively.

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Tilray received a third EU GMP certification for its manufacturing facility in Cantanhede, Portugal, last month. Investors’ excitement about the GMP certification, the big fall in the first quarter, and renewed interest in the cannabis sector led to a rise in Tilray’s stock price. So, should you buy Tilray at these levels?

Analysts’ revenue expectation for Tilray

Analysts expect Tilray to report revenue of $238.0 million in 2020 and $369.4 million in 2021. These expectations represent YoY (year-over-year) growth of 42.5% in 2020 and 55.2% in 2021. During the first-quarter earnings call, the company’s management stated that it would channel its focus on building its Canada recreational business, the global medical cannabis business, and the global hemp business. The company has been developing innovative Cannabis 2.0 products and expanding its distribution in Canada. Tilray appointed Kindred as an exclusive sales agent for its recreational cannabis products in Canada except for Quebec. The company expects the relationship to expand its footprint across the county.

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Tilray’s third EU GMP certification for its manufacturing facility in Cantanhede, Portugal, could boost its international medical sales. During the first quarter, the revenue from the hemp business increased from 24% in the first quarter last year to 41%. The company continues to expand its hemp foods business globally, which could contribute to its future sales growth.

Analysts’ EBITDA expectations for Tilray

Tilray hasn’t reported a positive EBITDA yet. Analysts expect the company to become profitable in the first quarter of 2021. They expect the company’s EBITDA to be a loss of $56.4 million in 2020, which represents an improvement from a loss of $89.8 million in 2019. For 2021, they expect the company to report a positive EBITDA of $10.8 million. The company has taken initiatives, like lowering its corporate headcount and improving its operational efficiency through automation, to lower its expenses and improve its profitability. Last month, the company announced that it would permanently shut down its High Park Gardens facility located in Leamington, Ontario. Closing the facility could save $7.5 million annually for the company. Also, growth in higher-margin Cannabis 2.0 product sales could improve Tilray’s margins.

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Liquidity

In the last quarter, Tilray raised $145.3 million through equity offerings and debt facilities. By the end of the quarter, the company had $174 million in cash and cash equivalents. The company expects a cash outflow of $110 million–$125 million for this fiscal year. So, I think that the company’s liquidity position is reasonably strong.

Analysts’ recommendations

Analysts’ reactions were mixed on Tilray’s first-quarter performance. Since the company reported its first-quarter earnings, MKM Partners, Stifel, and Jefferies have raised their target prices. Meanwhile, Cowen, Benchmark, and Eight Capital cut their target prices. As of Thursday, analysts’ consensus target price was $8.58, which represents a 12-month return potential of 0.2%. Meanwhile, analysts favor a “hold” rating for the stock. Among the 16 analysts, 75% recommend a “hold,” 12.5% recommend a “buy,” and 12.5% recommend a “sell.”

My take on Tilray

I’m not convinced about Tilray’s turnaround. I think investors should stay away from the stock in the near term. The company hasn’t managed to reduce its expenses. In the last quarter, Tilray’s net losses were $184.1 million, which was significantly higher than $29.4 million reported in the corresponding quarter of 2018. So, I think that the company could struggle to reach profitability soon due to pricing pressure, lower-than-expected demand for Cannabis 2.0 products, and thriving black market sales.

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