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Monday, January 30, 2023

Tilray investors need to prepare for this year

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Tilray brands (TLRY -5.25%) And other Canadian cannabis companies have struggled to generate growth, as competition has been heating up over the years and there hasn’t been enough demand to go around. Nor has there been any significant progress in legalizing marijuana in the United States and other parts of the world to help open up new growth opportunities.

But while things may look bleak for some stocks right now, it could be particularly bad for Tilray.

Investors should prepare for the inevitable

On January 9, Tilray released its earnings numbers for the second quarter, which failed to impress. Net revenue of $144.1 million for the period ended November 30, 2022 was down 7% from the year-ago period as the company’s top line continues to suffer. And although Tilray will boast its 15th consecutive quarter of positive adjusted EBITDA (EBITDA), it also recorded a huge net loss of $61.6 million.

It only confirms what investors should prepare for: the moment management declares that its overly optimistic and ambitious revenue target of $4 billion by 2024 cannot be met. It was a forecast look Unrealistic in 2021and now it seems next to impossible, except for some significant acquisitions.

on the company Most recent earnings callCEO Irwin Simon stated that the projections were based on expectations of marijuana legalization not only in the United States but in Europe as well. But at the same time, he still does not rule out the possibility of reaching those expectations, saying, “If legalization happens tomorrow, it is possible.”

He also noted that through diversification, hitting the revenue target could still be a possibility. One area he identified as an opportunity was the cultivation of fruits and vegetables.

And so while Simon appears to be becoming more pessimistic about the prospects for legalization, it doesn’t look like he’s given up on the revenue target just yet. But it may only be a matter of time before that changes.

Why can the stock still go down from where it is now?

Based on the price-to-sales ratio, Tilray is not a cheap buy compared to others pot stock In industry:

TLRY PS ratio data by YCharts

Its rating is in line with the competitor’s canopy growthbut it trades at a premium compared to Aurora hemp And SNDL, which also struggled to grow. However, Canopy Growth has the advantage of having more than C$1.1 billion in cash and investments on its books and getting backed by the brewer. Constellation Brands. Tilray doesn’t have the same safety net — cash and marketable securities totaled $433.5 million last quarter, and it lacks a great partner.

If investors start valuing Tilray as a riskier stock, about where Aurora and SNDL trade, there could be more downside risks for the cannabis company. That could happen if investors lose confidence in Simon and his overly optimistic forecasts.

Tilray investors should get rid of the shares before things get worse

In the past year, Tilray stock has lost more than half its value. If Simon announces a lower outlook for fiscal 2024 this year, that could send the stock down even further. But even if he chooses not to give a forecast, investors will see the writing on the wall this year. If the company’s top line continues to decline, arguably, an official announcement wouldn’t even be necessary to state the obvious, which is that the $4 billion revenue projection isn’t realistic.

Without the prospect of some attractive growth prospects, there wouldn’t be much reason to expect much upside behind the stock. This is why Tilray will likely have another tough year in 2023.

David Jagielsky He has no position in any of the aforementioned shares. The Motley Fool has and recommends positions at Constellation Brands. The Motley Fool has a file Disclosure policy.

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