The marijuana industry boomed during the pandemic due to rising sales for both recreational and medical purposes. However, the industry has been under pressure lately due to oversupply and slowing demand due to high inflation.
With inflation remaining elevated and the federal funds rate likely to rise further, the economy could enter a recession, putting pressure on the cannabis industry. Amid this backdrop, it could be wise for investors to avoid fundamentally weak cannabis stocks Tilray Brands, Inc. (TLRY) and SNDL Inc. (SNDL). Let’s explore why they may be underperforming.
Despite getting legalized in various geographies, the cannabis industry has been under pressure as it faces economic and regulatory challenges. The industry is plagued with challenges of persistent inflation and higher costs for raw materials, which have slowed demand. Despite being legalized for the past four years, Canada’s market is struggling due to oversupply.
The supply glut has been driving down the wholesale and retail prices of cannabis. Moreover, the industry also faces a severe threat from illegal cannabis suppliers who undercut the price of legalized marijuana.
With the administrative review of marijuana unlikely to be completed this year, the cannabis industry will likely remain under pressure. Investors’ interest in cannabis stocks has diminished, as is evident from the ETFMG Alternative Harvest ETF’s (MJ) 64.3% decline over the past year.
Given these factors, it could be worth avoiding fundamentally weak cannabis stocks TLRY and SNDL.
Tilray Brands, Inc. (TLRY)
Headquartered in Leamington, Canada, TLRY conducts research, cultivation, production, marketing, and distribution of medical cannabis products worldwide. The company operates through four segments: Cannabis Business, Distribution Business, Beverage Alcohol Business, and Wellness Business.
In terms of the trailing-12-month gross profit margin, TLRY’s 20.59% is 63% lower than the 55.66% industry average. Its 2.95% trailing-12-month Capex/Sales is 36.6% lower than the 4.64% industry average. Likewise, its 0.11x trailing-12-month asset turnover ratio is 68.4% lower than the industry average of 0.34x.
For the fiscal second quarter that ended November 30, 2022, TLRY’s net revenue decreased 7.1% year-over-year to $144.14 million. Its total operating expenses increased 4.1% year-over-year to $91.92 million. The company’s adjusted gross profit declined 7.9% from the prior-year quarter to $41.23 million.
Its adjusted EBITDA declined 14.9% year-over-year to $11.71 million. Its adjusted net loss and adjusted loss per share came in at $35.31 million and $0.06, respectively.
Analysts expect TLRY’s revenue for the quarter that ended February 28, 2023, to decline 0.6% year-over-year to $150.91 million. Its EPS for the current quarter is expected to remain negative. Over the past year, the stock has declined 54.8% to close the last trading session at $2.57.
TLRY’s weak fundamentals are reflected 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 assess stocks by 118 different factors, each with its own weighting.
Within the D-rated Medical - Pharmaceuticals industry, it is ranked last out of 166 stocks. It has an F grade for Value, Momentum, and Sentiment and a D for Stability and Quality.
We have also given TLRY a grade for Growth. Get all TLRY ratings here.
SNDL Inc. (SNDL)
Headquartered in Calgary, Canada, SNDL produces, distributes, and sells cannabis products in Canada. The company operates through Cannabis Operations and Retail Operations segments.
In terms of the trailing-12-month gross profit margin, SNDL’s 19.07% is 65.7% lower than the 55.66% industry average. Its 0.30x trailing-12-month asset turnover ratio is 11% lower than the 0.34x industry average. Likewise, its 1.51% trailing-12-month Capex/Sales is 67.5% lower than the 4.64% industry average.
For the fiscal third quarter that ended September 30, 2022, SNDL’s loss from operations widened 365% year-over-year to CA$88.54 million ($64.57 million). Its net loss attributable to owners of the company came in at CA$98.11 million ($71.55 million), compared to a net income of CA$16.71 million ($12.19 million) in the prior-year period.
Its net loss per common share attributable to owners of the company came in at CA$0.41, compared to a net income per common share of CA$0.08 in the year-ago period.
Analysts expect its EPS for fiscal 2022 to remain negative. It has a bleak earnings surprise history, missing the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has fallen 74.4% to close the last trading session at $1.50.
SNDL’s grim prospects are reflected in its POWR Ratings. It has an overall rating of D, which translates to Sell in our proprietary rating system.
It is ranked #140 in the same industry. SNDL has an F grade for Momentum and Stability and a D for Sentiment and Quality. Click here to see the additional ratings of SNDL for Growth and Value.
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TLRY shares were trading at $2.70 per share on Thursday morning, up $0.13 (+5.06%). Year-to-date, TLRY has gained 0.37%, versus a 4.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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