Tilray Earnings: Placing Shares Under Review as We Revisit Assumptions Under Slow Organic Growth

We are placing no-moat Tilray TLRY under review as we may reduce our $5.50 and CAD 7 per share fair value estimates by as much as 30% to 40%. We reiterate our Very High Uncertainty Rating as Tilray has yet to achieve positive free cash flow and faces the risk of equity dilution to fund continuing cash burn. Given its lack of cash flow, changes to our estimates can have dramatic effects on fair value estimates.

Tilray reported fiscal first-quarter 2024 results, including net revenue of $177 million that was up 15% year over year but down 4% sequentially. Its adjusted EBITDA margin fell to 6% from 9% the prior year. We believe most of this decrease came from the cannabis segment as its adjusted gross margin fell to 35% from 51%. The massive decline in cannabis profitability is due to the Hexo acquisition (which ended the advisory fee) and continued price compression.

Organic growth is of particular concern to us. Although Tilray doesn’t distinguish between acquired and organic growth, it appears that top-line gains mostly come in quarters after deals have closed. For example, the Hexo acquisition closed during the first quarter, leading to a dramatic 15% sales increase. Weak organic growth worries us as it will take longer for Tilray to consolidate the crowded Canadian market to reach a profitable scale.

Additionally, the loss of the Hexo advisory fee had a surprisingly large effect on cannabis gross margins. It now appears that run-rate cannabis margins are lower than we thought, leading us to revisit our long-term assumptions for Tilray’s largest segment by revenue.

Lastly, we plan to revisit our alcohol assumptions with the acquisition of eight craft brewery brands from wide-moat Anheuser-Busch now closed. The margins between beer and spirits are different—roughly above 50% and equal to 50%, respectively, according to management. Thus, the changing product mix affects the segment’s long-term margin outlook, depending on which products’ sales grow faster.