Marijuana stocks have largely underperformed the market over the past year, until now.
Pot stocks surged higher last week, driven by enthusiasm over decriminalization. On Election Day voters in South Dakota, Montana, New Jersey and Arizona legalized pot for recreational marijuana, while South Dakota and Mississippi legalized it for medicinal purposes. The news sent pot stocks soaring last week, including Tilray (TLRY) which surged 70% last week alone. The enthusiasm over legalization sent the ETFMG Alternative Harvest ETF (MJ) — home to, among others, Canopy Growth (CGC) and Cronos (CRON) — soaring 27% last week.
But how high can pot stocks rise? And can the economics of the industry finally reward investors with sustainable profits? Canadian cannabis company Tilray will attempt to answer these questions when it reports third quarter fiscal 2020 earnings results after the closing bell Monday. Tilray, which generates about two-thirds of its revenue from cannabis sales, stands to benefit significantly not only from decriminalization, but also increased adoption cannabis-infused products such as carbonated beverages.
That said, Tilray’s gross margins have been under pressure and has yielded steeper-than-expected quarterly loss due to lower pot prices in Canada and coronavirus-related U.S. store closures, among other headwinds. With high operating costs still an issue, the battle over legalization now appears more favorable. As such, on Monday the company will need to offer significantly more optimism not only with its operating metrics, but also for the state of the cannabis industry. Otherwise, the strong stock gains enjoyed last week may prove to be just a temporary high.
In the three months that ended September, Wall Street expect the company to report a per-share loss of 21 cents on revenue of $54.88 million. This compares to the year-ago quarter when it reported a per-share loss of 36 cents on revenue of $51.1 million. For the full year, ending in December, the loss is expected to be $2.65 per share, while full-year revenue is expected to rise 31.7% year over year to $220 million.
Tilray’s focus has been on the development of cannabis-based medicines, drugs, drops, and oil products. But as with the rest of the Canadian cannabis producers, Tilray has had difficulty entering the lucrative U.S. market given that marijuana remains illegal at the federal level. As a means of entry in the market, Tilray acquired Manitoba Harvest in early 2019. Revenue from Manitoba, a hemp foods producer, has not been enough to offset the weakness in Tilray’s bread-and-butter pot business. But things are looking brighter.
The U.S. marijuana market is now in play with a democrat in the White House at a time when more states of moving towards marijuana legalization. While there are still many questions to be answered, cannabis companies must show better execution. In the case of Tilray, while it has worked to differentiate itself from its competitors, the company has missed earnings expectation in eight of the nine last reporting periods.
On Monday investors will want some clear signs of operational improvement, along with increased confidence that Tilray can capture a meaningful chunk of the cannabis market as decriminalization continues.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
Read Richard's Bio