Following euphoric growth in the past years, the cannabis industry is now witnessing a slowdown in sales, impacted by several regulatory and economic headwinds. In light of this, it could be wise to steer clear of fundamentally weak cannabis stocks Tilray Brands, Inc. (TLRY) and SNDL Inc. (SNDL) for now.
The cannabis industry underwent significant growth over the past years due to its expanding legalization and a surge of capital from venture capital firms and other investors.
According to the National Conference of State Legislatures, the recreational use of cannabis has been legalized in 21 U.S. states. Adult-use marijuana is also legal in the District of Columbia, Guam, and the Northern Mariana Islands. However, recently Oklahoma residents voted against the legalization of the recreational use of marijuana. In Canada, cannabis is legal for both recreation and medical purposes.
Following a sales boom during the pandemic, the cannabis industry is now exhibiting signs of deceleration as it faces several economic and regulatory headwinds, including high inflation weighing on overall demand. Unfavorable government taxation policies are taking a significant toll on Canadian cannabis producers, leading to a recent wave of mass layoffs.
The legal sales of cannabis experienced a significant decline in the wake of an uncertain economy last year. Taxable sales in California decreased by 8.2% year-over-year in 2022, totaling $5.3 billion. Similarly, Colorado witnessed a 20% drop in marijuana sales to $1.8 billion during the same period.
Persistent inflation and higher costs for fertilizers, raw materials, and packaging will likely continue to hurt the cannabis industry players in 2023. Also, the possibility of a recession might dampen consumer expenditure on discretionary goods, including cannabis products.
Investors’ interest in cannabis stocks is waning, as evidenced by the AdvisorShares Pure US Cannabis ETF’s (MSOS) decline of 29.4% over the past three months. Let’s discuss why it could be wise to steer clear of high-risk cannabis stocks TLRY and SNDL.
Tilray Brands, Inc. (TLRY)
Headquartered in Leamington, Canada, TLRY researches, cultivates, and markets medical cannabis products globally. Its segments include Cannabis Business; Distribution Business; Beverage Alcohol Business; and Wellness Business. The company provides cannabis products for both medicinal and adult use.
TLRY’s trailing-12-month gross profit margin of 20.59% is 62.9% lower than the industry average of 55.48%. Moreover, the stock’s trailing-12-month EBITDA margin and net income margin of negative 11.43% and negative 95.91% compare to the industry averages of 3.39% and negative 7.07%, respectively.
For the fiscal 2023 second quarter that ended November 30, 2022, TLRY’s net revenue decreased 7.1% year-over-year to $144.14 million. Its operating expenses increased 4.1% year-over-year to $91.92 million. Also, the company’s adjusted EBITDA came in at $11.71 million, a 14.9% decline from the prior year’s period.
In addition, the company’s adjusted net loss and adjusted loss per share came in at $35.31 million and $0.06, respectively.
Analysts expect TLRY’s revenue to decline 3% year-over-year to $609.53 million for the fiscal year ending May 2023. The company is also expected to report a loss per share of $0.28 for the current fiscal year. Furthermore, the company missed its revenue estimates in three of four trailing quarters, which is disappointing.
The stock has plunged 26.5% over the past six months and 50% over the past year to close the last trading session at $2.44.
TLRY’s poor prospects are also apparent in its POWR Ratings. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock also has an F grade for Value, Momentum, and Sentiment. Within the D-rated Medical - Pharmaceuticals industry, it ranks #166 of 167 stocks.
Beyond what we stated above, we also have TLRY’s ratings for Growth, Stability, and Quality. Get all TLRY ratings here.
SNDL Inc. (SNDL)
Headquartered in Calgary, Canada, SNDL produces and sells cannabis products. It operates through Cannabis Operations and Retail Operations segments. The company cultivates and distributes cannabis for adult-use markets and conducts private sales of recreational cannabis through corporate-owned and franchised retail cannabis outlets.
The stock’s trailing-12-month gross profit margin of 19.07% is 65.6% lower than the industry average of 55.48%. Also, SNDL’s trailing-12-month CAPEX/Sales and asset turnover ratio of 1.51% and 0.30x are 67.4% and 11% lower than the 4.63% and 0.34x industry averages, respectively.
SNDL’s loss from operations widened 365% year-over-year to CAD 88.54 million ($64.50 million) during the third quarter that ended September 30, 2022. The company’s net loss came in at CAD 98.84 million ($72 million), compared to a net income of CAD 16.71 million ($12.17 million) in the prior year’s period. Also, its loss per share was CAD 0.41, compared to an EPS of CAD 0.08 in the previous year’s quarter.
As of September 30, 2022, the company’s cash and cash equivalents stood at CAD 291.43 million ($212.20 million), compared to CAD 558.25 million ($406.69 million) as of December 31, 2021.
Analysts expect SNDL to report a loss per share of $0.65 for the fiscal year that ended December 2022. Also, the company is expected to report a loss per share of $0.06 for the current fiscal year ending December 2023. Shares of SNDL have slumped 25.5% over the past month and 67.6% over the past year to close the last trading session at $1.52.
SNDL’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, equating to Sell in our proprietary rating system.
The stock has an F grade for Stability and Momentum and a D for Quality and Sentiment. Within the same industry, it is ranked #130 of 167 stocks.
Click here to see the additional ratings of SNDL for Value and Growth.
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TLRY shares were trading at $2.46 per share on Tuesday afternoon, up $0.02 (+0.82%). Year-to-date, TLRY has declined -8.55%, versus a 2.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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