Tilray Earnings: Slower Revenue Growth and Margin Contraction

Key Morningstar Metrics for Tilray Brands

• Fair Value Estimate: $2.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Tilray Brands’ Earnings

Tilray Brands TLRY issued disappointing results for the fiscal third quarter (February-ended) of 2024, including slower revenue growth and margin contraction. Changes to our forecast alone imply a valuation reduction roughly in line with the ensuing market price decline of about 21%. In addition, we’ve removed all contributions to our fair value estimate from Tilray’s ownership of US multistate operator Medmen’s senior secured convertible notes, as a complete write-off of the investment seems inevitable. The asset had made up about 20% of our fair value estimate.

Due to these factors, we are cutting our fair value estimate to $2. As reflected in our Very High Uncertainty Rating, changes to our forecast can have dramatic effects on our fair value estimates, especially as Tilray has yet to achieve positive free cash flow. Shares trade close to our updated fair value estimates.

Tilray reported net revenue of $188 million in the quarter, down 3% sequentially. The third quarter tends to be weak because of fewer cannabis and alcohol purchases during the winter. Still, the 5% sequential decline in cannabis revenue included some lost market share and price compression, driving us to lower our fiscal 2024 net revenue forecast to $755 million from $783 million and our adjusted EBITDA forecast to $60.5 million from $72.6 million.

Margin contraction was particularly worrisome, given that the third-quarter adjusted EBITDA margin of 5% was about half of last year’s third-quarter level. Some of the decline was because of dilution from recently acquired beer brands, and profitability should improve as capacity utilization increases. Even so, we’ve lowered our long-term adjusted EBITDA margin forecast to 20% from 23% to reflect margin differences across segments.