During yesterday’s trading session Tilray (TLRY) and Aurora Cannabis (ACB) has surged 57% collectively. Is this a sign of the cannabis sector coming back?
Lack of Growth for Tilray (TLRY)
Tilray reported 2020 Q1 results on May 11 and it has shown a small increase in revenue as growth in hemp outpaced the uptick in cannabis. Cannabis revenue increased by 9% in Q1 following a 20% decline in the previous quarter.
Manitoba Harvest recorded a sizeable increase in revenue and hemp sales actually carry a higher gross margin compared to cannabis. The total gross margin fell to 21% due to a $4 million inventory adjustment.
Without the inventory impairment, gross margins could have been 29% which is a partial recovery from the previous quarter. Tilray has been targeting higher sales from its international cannabis segment which will contribute positively to the consolidated margin.
Despite still being a small part of the overall segment, Tilray has seen more success in its European sales and it has been spending more capital developing assets over there.
Tilray (TLRY): Liquidity and Balance Sheet
Tilray has been trying to cut back spending and stem cash outflows as the industry grapples with a bleak capital raising environment. Operating cash outflows decreased from $91 million in Q4 2019 to $54 million in Q1 2020. Capital expenditures were $18 million which is similar to previous quarters. The company didn’t make new acquisitions. The improvement in operating cash flow was due to reductions in SG&A, not revenue.
Tilray (TLRY): Looking Ahead
Tilray’s Q1 results were in-line with other LPs as the industry as a whole saw robust demand during the pandemic. Revenue also increased generally due to the launch of 2.0 products and more retail outlets opened across the nation. However, the growth was underwhelming after taking into account the expectations for 2.0 projects. One of the key catalysts for cannabis stocks was the launch of edibles and beverages which had the promise of unleashing a wave of growth in consumer demand. While sales increased, most LPs indicated that the new products only had a limited impact on their top-lines so far. Whether LPs could drive step-change in their revenue model will determine the fate of the whole sector. For Tilray specifically, we think the focus on EBITDA break-even and cash flow burn will remain important to investors. Given the lack of growth levers and continued pressure to cut costs aggressively, we believe Tilray shares remain speculative at current levels. We prefer high-quality U.S. cannabis operators that have superior growth profile, solid balance sheet, and more attractive valuation.
Why Aurora Cannabis (ACB) Skyrocketed this week
After the market closed on Wednesday, Aurora announced that it struck a deal to acquire Reliva LLC, a popular retail cannabidiol (CBD) brand in the U.S.
Unlike marijuana, CBD doesn’t get people high. Yet many people use CBD products for their perceived health benefits. It’s a rapidly growing market — one that could generate $24 billion in retail sales by 2025 in the U.S. alone, according to the Brightfield Group.
Aurora has had its sights set on the U.S. CBD industry for a long time and is seeking to acquire Reliva to gain a beachhead into this potentially massive market. As a leading seller of hemp-derived CBD products — its wares can be purchased in over 20,000 U.S. retail locations — Reliva stands to profit handsomely from the industry’s growth.
As part of the agreement, Reliva’s members will receive $40 million worth of Aurora’s stock — and potentially an additional $45 million in stock, cash, or a combination thereof if the company can achieve certain financial targets over the coming two years.
Aurora Cannabis (ACB): Looking Ahead
Aurora expects the deal to immediately improve its profitability, as Reliva already produces positive earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a goal Aurora hopes to achieve by fiscal 2021.
