Tilray Close to Positive Free Cash Flow in Fiscal 2023; Continued Slumping Shares Very Undervalued

Tilray reported a decent fourth quarter and end to fiscal 2022, highlighted by its 13th straight quarter of positive adjusted EBITDA—a notable achievement as some Canada peers are years from breakeven. Gross cannabis revenue was up 23% from the third quarter, highlighted by an end to its Canada market struggles. Both Canada medical and adult-use sales grew sequentially, a relieving turnaround from the prior quarters’ declines. We continue to believe that more revenue growth and margin expansion is ahead but think it will take longer than we previously thought. As a result, we’ve cut our fair value estimates to $12 and CAD 15 per share, down from $14 and CAD 18, respectively for no-moat Tilray.

The broader market decline has hit harder for most cannabis names, Tilray included. Over the past three months, Tilray shares have declined nearly 30%, which isn’t as bad as the 50%-plus declines for Aurora and Canopy but much worse than the 4% decline in the Morningstar US Market Index. We now see the discount in Tilray as even more attractive, as we see little reason to warrant such a decline. Still, we reiterate our Very High Uncertainty Rating and caution that continued volatility is possible in the short term although we remain confident in Tilray’s long-term value.

Management reiterated its $4 billion sales by fiscal 2024 target, which assumes a change to U.S. federal law and looks a bit lofty compared with our $1.6 billion forecast. We do think that Tilray’s 2023 guidance for $70 million-$80 million in adjusted EBITDA and positive free cash flow are more achievable. Although we’re a bit more pessimistic at about $65 million in adjusted EBITDA and free cash flow loss of about $20 million (excluding earnouts related to the SweetWater acquisition), we acknowledge that management’s targets look reasonable if the year starts better than we anticipate. More important, Tilray is within striking distance of generating real cash flow, far ahead of its Canada peers.