What a fantastic six months it’s been for Tilray. Shares of the company have skyrocketed 75.5%, hitting $1.07. This performance may have investors wondering how to approach the situation.
Is now the time to buy Tilray, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Tilray Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Tilray. Here are three reasons why TLRY doesn't excite us and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Tilray’s operating margin decreased significantly over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Tilray’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 278%.
2. EPS Trending Down
We track the change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Tilray’s earnings losses deepened over the last three years as its EPS dropped 32.4% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Tilray’s low margin of safety could leave its stock price susceptible to large downswings.
3. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Tilray’s margin dropped by 8.1 percentage points over the last year. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s in the middle of a big investment cycle. Tilray’s free cash flow margin for the trailing 12 months was negative 14.7%.
Final Judgment
Tilray falls short of our quality standards. After the recent surge, the stock trades at 15.1× forward EV-to-EBITDA (or $1.07 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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