Sometimes it seems like things couldn’t get much worse for Tilray (NASDAQ:TLRY) stock Yet, against all odds, its shares always manage to hit new lows.
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Tilray’s shares, which infamously hit $300 during a short squeeze in 2018, recently fell below $10 and are trading around $9 this morning. The shares are now down over 50% during the past six months and more than 80% from their 52-week high.
Tilray’s problems are as much related to investors’ sentiment as its business results at this point. Sure, Tilray continues to lose tons of money.
But that’s not new; Tilray has had woeful operational results pretty much since it became a publicly traded company. So it’s unlikely that traders are dumping TLRY stock now because of the ongoing operating losses.
Sentiment Towards the Marijuana Sector
The bigger concern for the shares is that the sentiment towards marijuana stocks has gone sour. The Canadian marijuana sector is a dismal market plagued by crippling oversupply. That’s been the case for awhile.
What’s new, however, is that Tilray’s international prospects seem less promising now as well. And the shares of American marijuana producers have been in freefall this year.
The AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS) is now down 32% in 2021. It’s increasingly clear that marijuana legalization in the U.S. won’t be a panacea for firms like Tilray.
That said, is there any hope for the trajectory of TLRY stock to change in 2022?
Why Tilray Initially Struggled
It’s understandable why Tilray’s shares struggled out of the gate. After all, there were simply too many marijuana firms targeting the small Canadian market. Canada has a slightly smaller population than the state of California, yet investors were throwing untold billions of dollars at the Canadian market. Not surprisingly, that led to oversupply, causing the price of cannabis to plunge in Canada.
Tilray has lost money trying to sell marijuana in Canada, but then again, so has just about every company in that market. Tilray is increasing its production there in an effort to try to turn its business around. The strategy might eventually work.
Perhaps more problematic is the fact that the company’s long-awaited international opportunity still hasn’t materialized. Tilray was supposed to be able to take advantage of opportunities overseas. Yet its foreign businesses are not helping its operating results.
Tilray’s Losses Are Increasing
Last quarter, Tilray’s revenues climbed 43% year-over-year to $168 million. That might make it seem like the company is finally on the right track. However, it doesn’t appear that most of its sales were particularly profitable.
Tilray lost $35 million for the quarter, up sharply from the $22 million of red ink that it spilled during the same period last year. Its EBITDA , excluding certain items, barely stayed in positive territory.
The company has achieved strong top-line growth, which is better than nothing. But if it loses more money as its sales increase, its shareholders won’t benefit much from the trend.
Not surprisingly, many short sellers have locked in on Tilray; short interest as a percentage of the stock’s float is nearly 10%.
And certainly, its last earnings results didn’t do much to scare off the bears. The high short interest may set the stage for a short squeeze in the coming weeks. Over the longer term, however, there are valid reasons to be concerned about Tilray’s business model.
The Verdict on TLRY Stock
There are two questions to consider about Tilray. First, will the company manage to figure out how to produce and distribute cannabis profitably? And secondly, will the sentiment towards the sector improve?
There don’t appear to be any breakthroughs on the profitability front. The fact that the bulls are now pointing to Germany as Tilray’s potential salvation shows just how flawed its business model has been. Tilray hasn’t been able to consistently generate profits anywhere that it operates.
Rather, the bulls’ hope has always been that a new product or regulatory market will turn the tide. But until Tilray can actually demonstrate positive momentum, don’t give the company the benefit of the doubt.
Sentiment is a different matter, however, as it may be close to bottoming. Tax-loss selling should be almost over. And the excitement about potential U.S. cannabis legalization has played out and has turned to dejection. Most traders who held marijuana stocks in the hopes of that catalyst materializing have already sold their shares.
Meanwhile, the short interest in Tilray and other marijuana stocks is high. So a sharp, short-term rally may occur in January. Just don’t overstay your welcome if it arrives, since TLRY stock is still a dubious long-term investment.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.