Cannabis is an early-stage business and early stage businesses often must raise capital. Tilray (NASDAQ: TLRY) stock is no exception. But the timing and circumstances surrounding a stock offering can tell an investor a lot about a company.
Tilray recently opted to raise $90 million via a stock offering. Unfortunately, the timing and details of the offering may be a huge red flag for investors.
The Offering
On Friday, Mar. 13, Tilray announced it had priced a $90 million stock offering at $4.75. TLRY stock subsequently tanked and for good reason. There are plenty of things for investors to hate about this offering.
First, let’s start with the price. The $4.75 price represented a 30.3% discount to Thursday’s closing price of $5.95. Offerings are almost always priced below market price as an incentive for investors to buy in, but a 30% discount is a bit extreme. Stocks often at least temporarily trade in line with their offering prices or lower, so it’s no surprise that TLRY stock crashed down to around $3 on Monday.
Second, the offering represented 37% ownership dilution for existing shareholders. In other words, investors now own 37% less of the company following the offering.
Third, $90 million really isn’t that much money for that large of a dilution. In fact, $90 million is well less than half the $219.1 million in net losses the company reported in the fourth quarter of 2019 alone.
Timing Is Critical
Finally, in my opinion, the worst thing about this offering was the timing. Companies always want to raise capital from a position of strength, not weakness. This time last year, TLRY stock was trading at around $70 per share. As recently as last month, the stock was trading above $20. In fact, any other time in the history of the freaking stock would have been a better time to raise capital than right after we crashed into a bear market.
The timing of this offering tells me one of two things. Tilray management is completely clueless about finances, which seems unlikely. Or Tilray is absolutely desperate for cash. There’s no other reason why management would choose to dilute shareholders by 37% by selling shares at a 75% discount to their market price just a month ago to raise less than half of the cash it burned last quarter.
“While we understand the need to raise funds, we are surprised Tilray management would pretty much choose the worst of times to price the offering,” Cantor Fitzgerald analyst Pablo Zuanic says.
He’s not exaggerating. The warrants plus share issuance of the offering will increase share count by 38 million. The same offering priced at around $70 per share one year ago could have easily raised more than $1 billion for Tilray.
How to Play TLRY Stock
The only rational explanation for this offering is that Tilray management had no choice. At this point, they must be desperate for cash. That’s not the position any investor wants their company to be in when the global economy is staring down the barrel of a recession.
And don’t bet on Tilray being self-funded anytime soon.
“Because of the company’s well below average realized net pricing, we are more skeptical about a path to positive [earnings before interest, taxes, depreciation and amortization] which combined with aggressive guidance, leaves room for disappointment,” Zuanic says.
He has a “neutral” rating and $4.90 price target for TLRY stock, but I don’t know how. Following news of the offering, Zuanic cut his price target by 72% from $17.50. But I have a hard time believing the only thing standing between Tilray and success is $90 million.
Unless the global economy takes a dramatic 180-degree turn, I’m guessing Tilray will go back to raising capital again by the end of the year and from an even more desperate position. I can’t even imagine what the next offering will do to the stock.
For now, the name of the game in the cannabis space is access to capital and healthy balance sheets. Every stock will struggle in this climate. But I recommend Canopy Growth Corp (NYSE: CGC) and its financial backer Constellation Brands (NYSE: STZ) as the top play in cannabis at this time.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.