I wrote about Tilray (NASDAQ:TLRY) just ahead of their fiscal Q3 report in mid-April and explained why I believe TLRY stock is headed lower. The report wasn’t very good, and the stock did decline, but cannabis stocks have generally declined since then. I update my outlook in this article, and I believe the stock is even more overvalued today despite the 7% decline since 4/7.
The Q3 Report
Analysts had expected Tilray to generate revenue of $151 million in Q3 with adjusted EBITDA of $17 million. These forecasts were significantly lower than the estimates three months earlier.
Revenue was less than expected, decreasing 4% from a year earlier to $145.6 million. Worse for TLRY, the adjusted EBITDA was $14 million, 18% below the analyst expectations.
Looking at sales by category, cannabis sales fell 14% to $47.5 million, which was 33% of overall revenue. The pharmaceutical distribution revenue expanded slightly and was 45% of overall revenue. Despite M&A, beverage alcohol sales grew only 5% to $20.6 million, 14% of overall revenue. Wellness plunged 18% and represented just 8% of overall revenue.
The most challenging part of the report in my view was the increase in net debt from $144 million to $184 million and the plunge in tangible book value from $634 million to $404 million. Another big negative was that the company’s operations burned over $18 million during the quarter (and more than $36 million in the first three quarters).
The Outlook
Estimates came down sharply. Ahead of the report, analysts expected FY24 revenue to be $673 million with adjusted EBITDA of $94 million. Now, they project revenue will increase 12% to $667 million with adjusted EBITDA expanding 31% to $78 million, a reduction of 17% from the prior forecast.
Similarly, for FY25, analysts have lowered their estimates from revenue of $750 million and adjusted EBITDA of $121 million to revenue of $747 million and adjusted EBITDA of $113 million.
The HEXO Deal
After the close on 4/10, the company not only released the financials for fiscal Q3, as expected, but it also detailed a plan to acquire the balance of HEXO Corp. (HEXO). The updated numbers above probably don’t include this transaction, as it hasn’t yet closed. The company hasn’t provided guidance yet, but HEXO is currently expected by analysts to generate revenue of C$112 million in FY23, C$119 million in FY24 and C$142 million in FY25. Analysts project slightly negative adjusted EBITDA in FY23 picking up to slightly positive in FY24 and then C$14 million in FY25.
My big takeaway about the deal is that it wasn’t surprising and could be a good deal for Tilray. Then again, the company has a poor history of M&A in the cannabis industry, and this could merger prove to be disappointing. I don’t think that the deal will be a catalyst for TLRY. In fact, it’s likely to pressure the stock after it closes as HEXO shareholders receive TLRY stock.
One thing I find very interesting is how expensive HEXO trades now, closing at $1.39. The structure of the deal calls for HEXO shareholders to receive .4352 TLRY shares per share. Taking the TLRY price of $2.41, this works out to just $1.05. HEXO shareholders should sell their stock at a 32% premium!
My New Target
TLRY closed Friday at $2.41, down just 10.4% so far in 2023, which is less than the 17% decline in the New Cannabis Ventures Global Cannabis Stock Index. In my last piece, I discussed why TLRY, which was trading on 4/7 at $2.60 and ran up to $2.74 on the 10th. should be trading at $1.32 based on the sum-of-the-parts. Ahead of the report, the stock traded at 2.6X tangible book value, a huge premium to peers that I characterized as “way too high.”
Now the stock’s price-to-tangible-book-value is much higher at 3.8X. This is outrageously high and compares to Canopy Growth (CGC) at 0.67X, Cronos Group (CRON) at 0.67X, Organigram (OGI), my favorite cannabis stock, at 0.49X and Village Farms (VFF) at just 0.34X. My target in April worked out to be 1.3X, and I am using this as a primary method for targeting now. My new target, though, is just 1.5X tangible book value, which works out to be $606 million, a price of $0.96, which is 60% lower.
My enterprise value target of $790 million works out to be 10.1X projected adjusted EBITDA for the year ending May 2024 and 7.0X projected adjusted EBITDA for the year ending May 2025. While these levels seem low, one can find plenty of cannabis stocks that trade cheaper right now.
Conclusion
Tilray remains overly popular with cannabis investors. Here at Seeking Alpha, there are over 137K followers. This just behind Canopy Growth, another Canadian LP stock that I don’t like. The very largest American cannabis operator, Curaleaf (OTCPK:CURLF) has less than 25K followers. CNBC’s Tim Seymour’s ETF, Amplify Seymour Cannabis ETF (CNBS) has it as the largest position at 10.3%.
The stock remains overvalued in my view despite posting a new all-time low recently. I have dramatically lowered my target, which is now based on a ratio of tangible book value at a premium to all of its peers. If I am right, Tilray will break $1.
I continue to recommend that investors choose other LPs, like Cronos Group, Organigram and Village Farms . I have written here on all of these stocks this year, and each trades at a massive discount to tangible book value. Cronos Group and Organigram, which both have strategic investors, have a lot of cash and no debt.
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