If you own a stake in Tilray (NASDAQ:TLRY) and want to know what’s going to make or break Tilray stock following its upcoming quarterly earnings report, look no further than the responses to quarterly reports from rivals Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC). Investors, professionals and amateurs alike, have already indicated what annoys and delights them.
There’s no certainty as to when that announcement might be made, to be clear. Given the company’s prior announcement cadence, it was widely presumed the news would drop on Feb. 13. It didn’t.
Also noteworthy is the timing of Canopy Growth’s report, which was posted late in the night on Feb. 14, just beating its regulatory deadline. Tilray’s post could surface at any time, without warning, if Canopy’s timing is any indication.
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Every hour between now and when that happens, though, is an hour owners of TLRY stock can use to better figure out what’s making pot stocks tick.
The responses to the quarterly numbers for the cannabis industry’s most recognizable names thus far has been mixed.
More than that, however, it has been surprisingly muted given the mania that surrounded these names in the latter half of last year. Canopy Growth stock was up measurably but modestly on Friday following Thursday evening’s post, while shares of Aurora Cannabis have slumped somewhat since delivering last quarter’s numbers on Monday, Feb. 11.
The market has made it clear how it’s judging marijuana stocks, however. Chief among the concerns? Believe it or not, profitability … sort of.
Nobody really expected any cannabis startup to turn a GAAP profit last quarter, even though Canada’s legalization in October led to triple-digit revenue growth. All of the key names in the business are spending briskly on acquisitions, positioning for the day when market share matters.
Still, it has already become a part of the discussion. Canaccord Genuity analyst Matt Bottomley made a point of pointing out Canopy Growth’s gross margins fell sequentially, from 28% to 22%.
In that same vein, Cowen analyst Vivien Azer wrote “WEED [Canopy Growth’s Canadian ticker] net revenues of $83 mm were up 256% sequentially, and in line with consensus, which is a relief given the meaningful miss last quarter. The offset, however, seems to be an absence of production efficiencies as cash COGS (cost of goods sold) / gram continued to climb, and was $5.11 in the quarter, a far cry from the $2-3 we see from WEED’s peers.â€
The fact that such matters are being discussed so soon is telling.
Canopy’s $75.1 billion (Canadian) EBITDA loss was tough to overlook versus the $5.6 billion (again, Canadian) EBITDA loss suffered in the same quarter a year earlier against a backdrop of the 282% year-over-year improvement in revenue.
Nevertheless, the industry has learned quickly the importance of managing perceptions. CFO Timothy Saunders redirected investors’ attention to the EBITDA figure, which abated some of the company’s net loss that includes stock-based compensation expense. That figure looked considerably healthier than the GAAP bottom line.
Canopy’s quarterly report also conceded, perhaps preemptively, that the average selling price of dried leaves fell from $8.30 (Canadian) per gram a year ago to $7.33 per gram last quarter. That company added, however, that it expects pricing to stabilize in the foreseeable future.
The price declines subtly rekindle concerns that the bigger the marijuana industry becomes, the more commoditized it will become, ultimately launching a price war. Small and poorly-funded companies that spend too aggressively to secure market share may find lower pricing power makes it difficult, if not impossible, to service all their debt and justify bloated, complicated organizational structures.
Aurora’s official statement acknowledged the same, explaining “The decrease [in gross margin] was primarily due to a lower average selling price per gram of dried cannabis, the impact of excise taxes on medical cannabis net revenues, and a temporarily lower proportion of cannabis oil sales in the company’s sales mix ratio.â€
To that end, Aurora’s gross margin on cannabis sales fell sequentially from 70% to 54%, and were down from 63% in the comparable quarter a year earlier. Like Canopy Growth though, Aurora was sure to suggest the trend was a temporary one.
These organizations have already learned the importance of managing narratives. Tilray’s effort to do the same will be worth noting.
They’re metrics that seemingly hadn’t mattered until now. To date, fans and followers of marijuana’s legalization movement were content to let the premise of pot be enough to justify ownership of these names. Perhaps more keenly aware than usual that all of this capital consumption has to be justified sooner or later though, the market has imposed some pretty traditional criteria on the relatively young industry’s stocks.
As for Tilray stock, as of the latest look, the small group of analysts following it are calling for a top line of $12.8 million to lead to a per-share loss of 14 cents for the recently ended quarter.
Undoubtedly investors will pass some degree of judgment based on how the company’s results match up to expectations. More than that, though, it looks as if the market is already willing to weigh pot stocks on more meaningful measures like margins, pricing power and efficiency. Tilray doesn’t have to turn a profit, but it does have to stack up against its competitors.
That happened much sooner than it normally has for other “new†industries.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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