Tilray close to positive free cash flow in fiscal 2023; Deeply Undervalued Stocks Continue to Fall

Tilray reported a decent fourth quarter and year-end 2022, highlighted by its 13th consecutive quarter of positive adjusted EBITDA – a notable achievement, as some Canadian peers are years away from breaking even. Cannabis gross revenue was up 23% from the third quarter, highlighted by the end of its struggles in the Canadian market. Medical and adult sales in Canada increased sequentially, a turnaround that relieved declines in previous quarters. We continue to believe that greater revenue growth and margin expansion are ahead, but believe it will take longer than expected. As a result, we have reduced our fair value estimates to $12 and CAD 15 per share, compared to $14 and CAD 18, respectively, for Tilray Fluke.

The broader market decline has hit most cannabis names harder, including Tilray. Over the past three months, Tilray shares have fallen almost 30%, which isn’t quite as bad as the over 50% declines for Aurora and Canopy, but much worse than the 4% drop in Morningstar US Market Index. We now see the discount at Tilray as even more attractive, as we see no reason to justify such a drop. Nonetheless, we reiterate our very high uncertainty rating and caution that continued volatility is possible in the near term, although we remain confident in Tilray’s long-term value.

Management reiterated its sales target of $4 billion by fiscal year 2024, which assumes a change in US federal law and seems a bit high compared to our forecast of $1.6 billion. We believe Tilray’s 2023 guidance for $70-80 million adjusted EBITDA and positive free cash flow is more achievable. Although we are a little more pessimistic at around $65 million in adjusted EBITDA and a free cash flow loss of around $20 million (excluding earn-outs related to the SweetWater acquisition), we recognize that management’s objectives seem reasonable if the year starts better than expected. More importantly, Tilray is within striking distance of generating actual cash flow, far ahead of its Canadian peers.

About Myra R.

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