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Tilray unlikely to provide positive earnings until 2020, says Roth analyst

Roth’s Scott Fortune is keeping a Neutral rating without a price target on the cannabis company
cannabis plant
The analyst predicts that Tilray's gross margins will reach 45% to 50% over the next year

Canadian cannabis company Tilray Inc (NASDAQ:TLRY) is not likely to post positive earnings until 2020, according to a new note from Scott Fortune, an analyst with Roth Capital Partners

Fortune is keeping a Neutral rating without a price target on the stock, but says the company remains in pole position to be a “global leader” thanks to its partnerships with privately held Sandoz and Authentic Brands, and Anheuser-Busch InBev (NYSE:BUD), as well as its recent purchase of Manitoba Harvest, the world’s largest hemp-foods manufacturer.

“We expect strong industry growth long-term, and believe Tilray partnerships in various verticals positions the company to be a top global cannabis and CBD company,” Fortune wrote.

READ: Tilray focusing ‘outward’ from Canada to Europe and US, Melius Research says

The downside to its expansion efforts is the cost. “Tilray strategically is executing on partnerships and opportunistic acquisitions to build out Canada and globally, leading to increased operating expenses throughout 2018,” Fortune adds.

The Nanaimo, British Columbia-based cannabis company reported revenue of US$15.5 million in the fourth quarter, which came in ahead of Fortune’s estimate of $12.5 million.

Tilray's net loss during the fourth quarter was $31 million, or $0.33 per share, against a net loss of $3 million, or $0.04 a share, a year earlier. 

Tilray’s sales volumes held up in the quarter, with the cannabis company selling 2,053 kilograms compared to 694 kilograms a year ago. But the company’s efforts are still being hampered by supply problems as it’s still purchasing cannabis from third-party wholesalers at spot pricing to meet demand. But it expects these issues to be addressed in the next two quarters.

READ: Tilray misses 4Q earnings estimates but shares rally in pre-market trading

Fortune points out that Tilray’s delays in licensing are partly to blame for its difficulty in providing its own supply.

Looking ahead, Tilray has its eyes on gaining traction in the US hemp CBD market and expanding into medical markets, primarily in Europe. “Tilray believes the large market share opportunity is in the US and Europe, as the company continues to invest over the coming quarters to establish a foothold in these markets,” Fortune notes.

The company is set to stay in investment mode until the end of the year, but Fortune predicts its gross margins will reach 45% to 50% over the next year while its earnings and EBITDA won’t turn positive until 2020.

The Roth analyst also argues that Tilray currently trades at an “extreme” valuation multiple to its revenue and EBITDA, with shares trading well above his previous price target of $54.

Factors which could drag back the company’s shares include the pace of recreational cannabis adoption in Canada, faster or slower international medical cannabis sales, competition and pricing pressure on cannabis.

“Due to the unprecedented volatility, we currently have no price target and maintain our Neutral rating,” concludes Fortune. “We will continue to monitor Tilray during this time of uncertain volatility.”

Tilray specializes in medical cannabis and was one of the first Canadian cannabis companies to list in the US.

Tilray shares slipped 1.13% to hit $69.93 in New York trade on Thursday.

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