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Tilray (TLRY) Stock Is Headed for a Bumpy Ride, But Upside Remains Long-Term


Canadians from coast to coast toked up in celebration of marijuana’s legalization just about a month from ago when it was legalized on October 17th. Now pot companies are trying to cut through the red tape and meet the demand.

Tilray (TLRY), the Canadian marijuana business is growing, despite some licensing issues, which are to blame for the company’s lower-than-expected revenues for the third quarter of 2018. At least that’s what Cowen’s top analyst Vivien Azer says. That being said, while the analyst sees some “temporary speed bumps along the cannabis super highway,” she’s very bullish about what’s down the line.

To reflect a more conservative view, the analyst maintains an Outperform rating for TLRY stock, while lowering the price target to $150 from $172. Azer has a very good TipRanks score with a yearly average return of 29%, 70% success rate and she stands at #40 out of 4,887 on the analyst leaderboard.

Revenues were on the low end for Q318, at about $10 million while company guidance had been $10 – 10.5 million and Azer’s estimate was $10.1 million. The medical wholesale segment showed a 10% increase with third quarter revenues representing about 50% of revenues versus about 40% in the second quarter of this year 2018.  Wholesale accounts for excess THC oil sold to other LPs. The average selling price per gram was $6.21 versus $7.53 in Q317. Due to a tight supply sprouting from licensing delays for TLRY’s new High Park facility in Toronto mixed with under-indexing supply to CBD products, Tilray needed to source products from third parties. This contributed greatly to a gross margin decline of 24 points year-over-year to 31% with an EBITDA of -$7.4 million, which came in below Azer’s estimate of $6.1 million. The analyst expects margins to improve over time as the company adds scale and supply normalizes.

The company did not recognize adult use cannabis revenues throughout the quarter since its provincial partners were either not prepared or fully licensed to receive product from TLRY.  Moving forward, TLRY indicates initial end-user demand remains strong and is outpacing supply.

“As such, we think there is an opportunity for TLRY to expand its current product assortment with existing provinces as well as sign additional provincial agreements to address TLRY’s existing whitespace. However, we think supply may be challenged in 4Q18 as well as High Park ramps to capacity as it only recently received its license to cultivate 50% of the facility (~33k kg annual production) last week and will likely require several months to fully ramp and will not begin to ship until 1Q19. We note that 3rd-party product sourcing is likely a limited option as both the quantity and quality of available product from other LPs and farmers is not sufficient to meet demand,” Azer said.

In the last three months, three analysts have given their two cents on Tilray stock. TipRanks surveyed them, and out of the small lot, 2 are bullish and one is sidelined, which is translated to a Moderate Buy consensus rating and  a consensus price target of $175. (See TLRY’s price targets and analyst ratings on TipRanks)