Mediocre Q3 Earnings Cut Struggling Tilray Stock off at the Knees

Stocks to sell

Marijuana companies are surging, and Tilray (NASDAQ:TLRY) is no exception. Though Tilray stock has shown signs of life, it hasn’t shown enough of it.

Tilray (TLRY) logo on a web browser.

Source: Jarretera / Shutterstock.com

Marijuana stocks have been on fire over the past three weeks. It all started with the presidential election.

With Vice President Joe Biden set to take the reins in January, it’s changed the outlook for the U.S. marijuana industry going forward.

While it’s unclear just how much the Biden Administration will alter marijuana laws immediately, traders are wasting no time getting positioned. That makes a lot of sense; U.S. governments — both federally and on a state-by-state basis — are becoming more amenable to the marijuana industry.

This won’t necessarily help all marijuana companies equally though. Tilray is one such firm that may underperform even as the broader industry rebounds. Tilray has struggled to get any sales momentum in 2020, and it just dropped another earnings dud on the market earlier this month.

While Tilray stock could bounce, particularly thanks to the short interest in the name, there are reasons for long-term concern.

Q3 Earnings and Tilray Stock

Unfortunately, Tilray wasted little time in squandering the opportunity that it had gained from the shifting political winds. TLRY spiked more than 50%, surging from $6 to $10 following the presidential election. However, as soon as Tilray released the Q3 results, traders dumped the stock. Tilray shares fell back to $7 within a few days.

At first glance, the results might not seem too bad. After all, Tilray lost just 2 cents per share, which was well ahead of analyst expectations. Just based on that, things seem to be going alright. When you dig in further, however, the problems appear.

For one, the company grew revenues just 0.6% year-over-year. You can blame the pandemic to some degree for that, but plenty of other marijuana companies are still growing at the moment. If you’re going to pay a lofty valuation for a stock, it should be producing strong profits, growing quickly, or — ideally — both. However, Tilray has neither profits nor growth right now, yet it still is trading at an aggressive 6x revenues.

Even worse, Tilray’s losses are arguably larger than you see in the earnings per share figure. That’s because the company now has a trend of writing down part of its inventory each quarter. That makes sense, given the difficult market conditions in the retail marijuana market.

It’s no secret that Canada in particular has a massive glut of unsold cannabis. Still, by producing marijuana at one cost and then writing down part of the value later, it creates a distortion in the accounting numbers. Thus, it’s worth considering the broader picture, rather than taking too much comfort from the small reported loss.

Analysts Slam Tilray

Investment bank Jefferies immediately downgraded Tilray following the subpar results. In addition, Jefferies’ analyst issued some harsh words about Tilray’s outlook:

“At the same time, not reflecting fundamentals, the share price has run up on retail US market FOMO [fear of missing out] around the U.S. election. With question marks on international, the valuation unfairly inflated, and CEO share sales of $20 million on election run up, we [downgrade] to underperform.”

Jefferies had Tilray rated at neutral before, so that firm’s outlook from Tilray went from pretty muted already to outright negative now. They weren’t the only bank taking such measures.

In fact, Stifel slashed its price target for TLRY stock to a paltry $4.75 per share following the earnings release. Needless to say, even from the current share price, Tilray could have a lot farther to fall if Jefferies and Stifel are correct.

In fact, Tilray’s only real saving grace here is that sentiment is so negative toward the company. As of this writing, a stunning 41% of the float in TLRY stock has been sold short. When both traders and analysts are so negative, it sets the stage for a potential sharp move in the opposite direction.

TLRY Stock Verdict

Tilray is in an interesting place now. The company should still benefit from the broader marijuana sector rally. However, Tilray really wrecked its momentum with that dismal quarterly earnings report.

Now it’s a question of which factor will win out: The broad optimism around marijuana or the specific pessimism around Tilray’s failure to deliver any growth.

That should make Tilray a fascinating stock to trade in coming weeks. In particular, with that huge short interest, TLRY stock is primed to move on any improvement in sentiment.

For longer-term investors, though, there are better marijuana stocks to look at. While Tilray could bounce in the short-run, the company’s fundamental performance continues to lag that of its rivals.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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