Tilray Inc. (TLRY) was once considered the top dog in the cannabis industry, but after Monday's shaky earnings report, analysts are having second thoughts.
Eight Capital downgraded to Tilray to Neutral with a $17 price target, which is still an upside of 11%. Cowen analyst Vivien Azer left her market perform rating, but cut her price target from $20 to $15. Azer had downgraded the company prior to earnings on Feb. 24.
Since the cannabis industry is still emerging, companies are struggling to find the inventory sweet spot. Either it's too low and inventory shortages cause unhappy consumers, or it's too much and companies are forced to take charges. The one-two punch of a less than stellar Canada 2.0 launch and a delay in clarity on U.S. CBD -- cannabidiol -- regulations caused Tilray's revenues to miss estimates. Revenue did increase by 202% over last year to $46.94 million, but that missed estimates by $8.58 million. Azer had estimated $55 million for the third quarter and that included $4.2 million for price reductions.
Can't Count on Canada 2.0 Yet
Throughout the bear market of 2019 for the sector, cannabis investors had been banking on the addition of new products in the Canadian adult-use market. The companies, including Tilray, had plenty of time to prepare products for the market. Tilray had announced with great fanfare in 2018 a joint venture with Anheuser Busch Inbev (BUD) to create beverages. Delays have caused the beverage to be late to grab early market share. Beverages are not a big percentage of market share when it comes to form factors in cannabis, but it is one of the fastest growing. The company did introduce a new beverage called Everie developed by its joint venture called Fluent.
Edibles have proven to be popular, but supplies have been limited and many dispensaries have reported receiving small shipments that sell out immediately. While Tilray didn't break down its sales by category, it had been aggressively acquiring edible brands. The new brands included a confectionery products called Chowie Wowie and Goodship. The company also released some vape pens under the Marley Natural brand, but these have not been big sellers in the U.S. Maybe they will have better luck with Canadians.
Another concern is the company's dependency on some of its corporate customers. Two customers accounted for 13% each of revenue for 2019. Plus, just two customers accounted for 20% and 10%, respectively, of the company's accounts receivable balance.
The company took a $68 million charge for inventory adjustments due to an excess accumulation of oil for cannabis 2.0 products. The company said that "regulations did not allow the sale of these products until December 2019" in its earnings release. The company also wrote down its hemp products.
CBD Ya Later...
Tilray also had to write down $103 million in the fourth quarter on its agreement with Authentic Brands Group as the U.S. market has not progressed as planned. The Food & Drug Administration has yet to establish guidelines around CBD.
"The decline in fair value of the ABG participation rights is attributable to deferred regulatory clarity for sales of CBD products in the United States," said the company.
Manitoba Harvest is the company's biggest CBD asset and will be the source of its U.S. market products. But that acquisition looks like it will need more time before it will begin to pay off as intended. Tilray said it has dialed down its plans for U.S. CBD sales.
Azer noted that Tilray's net adult-use selling price was $3.19, which is one of the lowest in the market as the company got behind its value brand called The Batch. While value pricing can certainly affect a company's revenue, this bargain trend has also been occurring in the U.S., as well. High taxation is pushing consumers towards the cheaper products. They want the most THC for the price and have no interest in micro-dosing. So, getting behind the value customer shows Tilray has its finger on the pulse.
Whoever can weather this storm will emerge as a long-term cannabis player. Tilray may need to raise more money as the company tackles appropriate inventory levels, but for now the company ended 2019 with $97 million in cash. That is a pretty good cushion to have. The addition of more edible brands will address market demand and as more dispensaries are opened consumers will have more choice.
Also, while Tilray may be slow with its beverage from BUD, it is still ahead of its peers and could win first to market advantage. Vape sales also seem to be recovering and this form factor may bring back lost sales as consumers gain comfort with the current market offerings.
The market may have punished Tilray for its revenue miss, but it should not be counted out. Canada 2.0 will pay off, but the expectations that it would be as big or even bigger than the initial launch of adult use cannabis proved to be wrong.