Canadian cannabis giant Tilray (NASDAQ:TLRY) raised several eyebrows when it laid down its plans to reach $4 billion in annual sales by 2024. It recently raised its share count to 990 million shares in hopes of achieving its revenue target. And although the chances of achieving its lofty revenue goal appear to be slim, TLRY stock now trades at an overblown valuation. Moreover, it’s burning through its cash reserves fast, potentially compromising its top and bottom-line in pursuing its improbable target.
TLRY stock has had an incredibly volatile year in the market so far. The stock peaked at $67 at one time and went as low as $8.40. Overall, it has gained a healthy 40% since the start of the year and now trades at roughly seven times forward sales.
However, the significant risk surrounding its push towards the $4 billion revenue mark makes it an unattractive long-term bet.
Massive Cash Burn
Burning cash at the rate at which Tilray is doing is far from ideal in its attempt to pull off the impossible. At the end of the first quarter, it used more than $93 million in cash to fund its operational activities. In the previous quarter, it generated positive cash flows in excess of $8 million.
Naturally, the management is blaming its colossal merger with cannabis producer Aphria earlier this year. However, its adjusted free cash flows of $61 million are only a modest improvement from the negative $70 million cash flows it generated in the prior year.
Furthermore, the company is $1 billion in debt with just $376 million in cash. Considering the sorry state of its balance sheet, it’s tough to foresee how it could embark on an acquisition spree.
In the previous quarter, the management had implored the company shareholders to increase its authorized share count. On Sept. 10, the shareholders approved the additional shares taking the total tally to 990 million. And with the plan approved, I suspect that Tilray would need every one of these shares to fund its future sales plans.
Either way you look at it, the company is burning through a stupendous amount of money than it was in previous quarters, and the situation will only worsen.
More Cash Burn Ahead
Additionally, Tilray is likely to accelerate its growth strategy up several notches in the coming months. It is working towards what seems to be an insurmountable goal of $4 billion in revenues within the next three years. It involves several elements, including expansion outside Canada into the U.S. and other markets. Hence, it will involve a significant amount of cash outflows for the company.
It’s not the first time, though, and a cannabis company has surprised the market with its lofty ambitions. In 2019, Canadian cannabis producer HEXO (NASDAQ:HEXO) laid down plans to hit CA$400 million in sales. However, only a few months later, the CFO had to resign, and the company had to take a U-turn on its guidance.
One of the most concerning aspects for Tilray involves its expansion into the U.S. market through multi-state operator MedMen. However, its acquisition could potentially be a thorn in its side. MedMen recently reported a hefty net loss of $158 million, with its sales at a measly $145 million. Moreover, general and administrative costs soared to $125 million, accounting for 86% of the top-line results.
Final Word On TLRY Stock
Collectively, Tilray has massive plans for its future, but these are unlikely to culminate based on its fundamentals and bleak outlook.
It continues to burn cash at an incredible rate at a time when it needs an enormous amount of funds to finance its expansion plans. So, based on its current positioning, TLRY stock trades at a pricey valuation which its negative prospects can hardly justify.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.