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Cannabis stocks plunged when stocks overall were enjoying a large rally, and they fell this past week when they fell. Year-to-date, the New Cannabis Ventures Global Cannabis Stock Index has dropped 19.0%, while the S&P 500 has soared by 18.2%. We are not expecting any sort of “opposite effect” if stocks extend this negative move from the past couple of days.
This coming week, the market will get the Tilray Q4 report. The company, of course, is not just a cannabis company. In fact, cannabis revenue was only 33% of overall revenue in its Q3. The largest aspect of the company is its pharmaceutical distribution at 45% of Q3 sales, and the most exciting part for the company is its alcohol business, which grew 5% from a year ago and represented 14% of revenue. The company’s smallest division, “hemp wellness,” isn’t well at all. Its revenue dropped 39% from a year ago. Tilray used cash to fund its operations in Q3 and in the first three quarters, and its debt outstanding is higher than its cash.
We continue to be concerned with the valuation ahead of the report, though the stock has dropped a lot in 2023 and from its all-time high in 2018 near $300 right after it went public at $17. I have written about my own outlook at Seeking Alpha, and I shared a revised target of $0.87 a year from now with subscribers at 420 Investor. This target is based upon a ratio of 7X enterprise value to adjusted EBITDA for FY25, and it represents 1.4X tangible book value, a big premium to its peers.
After the collapse of Canopy Growth, which isn’t as diversified and which has worse financial condition, we think readers should be prepared for a potential meltdown in Tilray. The stock is down 37.7% already in 2023, which is a sharply larger loss than the Global Cannabis Stock Index:
The company is projected to generate overall revenue of $153 million in Q4, with adjusted EBITDA of $19 million. For FY24, the analysts expect Tilray to grow revenue by 12% to $671 million with adjusted EBITDA growing 32% to $78 million.
Even if we are wrong about our Tilray views, we remain very worried about the sector. Cannabis stocks remain very cheap in our view, and the fundamentals of the industry don’t seem so bad. We are concerned about the way cannabis stocks have been trading this year by falling when stocks are rallying. The low trading volumes alarm us, and we are concerned about the MSOS ETF and its very high exposure to just two names. There are some things that could happen that would likely boost the market, like the ability for American cannabis operators to trade on the NASDAQ or the elimination of 280E taxation, but we just aren’t there yet.
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Alan & Joel