Tilray stock financials are encouraging, especially if the loosening of cannabis restrictions materializes

Since the beginning of the year, the stock of Tilray Brands (NASDAQ:TLRY), a leading global cannabis producer, has lost some ground, down 3% to $6.80 per share. TLRY stock has performed better than the broader market on the period, due to renewed investor interest from the prospects of this leading cannabis actor and its poor stock performance last year.  

One of the biggest exchange-trading funds of the cannabis industry, with assets under management of over $200 million, is the AdvisorShares Pure Cannabis ETF (NYSEARCA:YOLO). The YOLO ETF lost 14% YTD to $11.15 per share. The SPDR S&P 500 Trust ETF (NYSEARCA:SPY), by comparison, withdrew by 7% to $439.90 per share. In the past few quarters, investors have pulled out from the industry, and YOLO lost more than 60% of its market capitalization since its high of $31.87 per share attained in February 2021.

With that in mind, let’s go through TLRY’s development prospects, financials and valuation metrics. These can help us gauge if it can put an end to its downward trend.

TLRY has a leading position in the recreational cannabis market in Canada, the U.S. and Germany. The global size of the cannabis industry is expected to grow rapidly in the next few years. According to Globenewswire, the cannabis market should increase by a Compound Annual Growth Rate (CAGR) of 27.25% in the 2021-2026 period, reaching a terminal value of $54.41 billion.

In addition, TLRY is well-positioned to benefit from the softening of the European legislation on recreational cannabis usage. With Luxembourg becoming the second European country to legalize its usage in October 2021, Germany is likely to endorse it later this year. This will have a material impact on Tilray’s business, given that the company is already present in the country with a market share of roughly 20%.

Furthermore, TLRY has enhanced the variety of products it markets, offering several new beverages and wellness-based cannabis products. For instance, Tilray can leverage two of its brands in the U.S., namely SweetWater and Manitoba Harvest, to expand its portfolio of products and enhance its revenues. SweetWater is the nation’s 11th-largest craft brewer, and Manitoba Harvest is a pioneer in hemp, CBD and wellness products.

TLRY Has Encouraging Financials, But It’s Still Profitless

The company published encouraging financial metrics in the second quarter of 2022. TLRY’s top line advanced 19.8% year-on-year to $155.1 million, whereas net income reached $5.79 million, compared to a net loss of $89.2 million in Q2 2021.

For fiscal year 2022, analysts are forecasting TLRY’s top line to advance by 28.5% YoY to $659 million, before increasing by 11.5% in 2023 to $735 million. Despite that, the company’s profitability is esteemed to remain in the red zone. With an expected net loss of $175 million in 2022, which should decelerate moderately in 2023 to $114 million, TLRY’s net margin is forecasted to remain negative, establishing at 15.5% in FY2023.

In terms of the balance sheet, TLRY’s cash and cash equivalents melted by 32% in the last six months, falling to $331.7 million. This has been attributable to TLRY’s active acquisition strategy. In December 2021 it bought Breckenridge Distillery. This will enable it to position itself more broadly ahead of the possible federal legalization of marijuana in the United States and to rapidly develop its line of cannabis-infused beverages.

While continuing to solidify its positioning in the U.S., TLRY managed to generate more than $70 million in cost synergies after the combination with Aphria. It is now expecting to exceed its initial plan by $20 million in 2023.

With these advancements, TLRY stock is forecasted to increase free cash flow in 2022, posting for the first time a beneficial amount of $42.6 million compared to a negative figure of $83.6 million last year.