What a brutal six months it’s been for Tilray. The stock has dropped 45.6% and now trades at $0.64, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Tilray, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Tilray Will Underperform?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than TLRY and a stock we'd rather own.

1. Shrinking Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Analyzing the trend in its profitability, Tilray’s operating margin decreased by 70.1 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Tilray’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 103%.

2. EPS Trending Down

Analyzing the change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Tilray, its EPS declined by 60.5% annually over the last three years while its revenue grew by 10.2%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Tilray’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 8%, meaning it lit $8.02 of cash on fire for every $100 in revenue.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of Tilray, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 7.8× forward EV-to-EBITDA (or $0.64 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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