Earnings season is in full swing now and while the numbers are a little better than I was steeled to see, many of the reports still leave a lot to be desired. Let’s start with Tesla Inc. (NASDAQ:TSLA).
People on Wall Street are cheering the fact that Elon Musk once again managed to swing the company to a profit after burning $500 million over the previous two quarters. At this rate, he might end the year roughly where he started.
That’s not the kind of business that usually earns a 1.8X sales valuation on the stock. And while Musk’s production mix has finally pivoted from luxury electric sedans to the mass-market Model 3, it’s hard to ignore the fact that Tesla’s revenue actually went down $500 million from last year.
Tesla isn’t even growing the top line quarter to quarter. If you’re evaluating this company according to sales, the stock should be pointed down.
Giant Stock, Tiny Company
I say more about this in my radio show, but I want to give you a preview here. I love Tesla cars; I just don’t see the appeal of the company or the stock.
Musk fans often say Tesla is one of the biggest disruptors on the planet and that it is eating the lunch of every established car company within charging range. I admit, it takes a brilliant imagination to engineer these vehicles and build a $25 billion market around them.
But even though General Motors Co. (NYSE:GM) is having a tough year, demand for GM cars is actually holding up better than what we’re seeing from Tesla. Weighing the two product lines, Tesla revenue is down 7 percent while GM is 6 percent below last year’s level.
And GM is still a behemoth with a commercial footprint six times bigger than its all-electric rival. While that top line isn’t rising, we can make the exact same case against Tesla.
Both companies had a rough quarter. The trade war has stung and with GM, labor tensions have boiled over. Neither stock is a prize right now.
Compared to Tesla, GM looks grossly undervalued. With nearly identical sales growth curves, is there any reason Tesla deserves a premium price?
Remember, GM is a profit machine that pays a 4 percent yield. Tesla has only made money so far when Musk cuts his way to positive margins. If sales are shrinking, you need to keep cutting to sustain profitability.
If you stripped the Tesla brand and Musk’s cult of personality from the stock and scrubbed all long-term hopes and fantasies from the revenue models, TSLA and GM should support a similar valuation right now.
They both make cars. They sell as many as they can as profitably as management can engineer. One car may be fancy and the other is an American classic, but cash flow has no taste. It’s all about the dollars.
On that basis, either TSLA should trade around $50 or GM should be a $180 stock. Is one too cheap or is the other too expensive relative to its peers?
But it’s a trader’s market. Click here now to watch my presentation about how you can profit when Wall Street turns choppy.
CANNABIS CORNER: WILL BIG WEED RUN OUT OF CASH?
As Canadian dispensaries stock their shelves with infused snacks and beverages, the big cultivators finally have space to differentiate themselves and their products. The coming quarter should be a revelation.
For now, however, a lot of investors still treat all the major cannabis stocks as interchangeable cogs in the big green machine. In the old “Canada 1.0” regulatory environment, that wasn’t far from reality.
After all, one ounce of dried plant looks just like all the others, no matter who grew it. And price controls ensure that nobody gets any brand power. It’s all commodity economics.
And when commodity economics rule, it’s all about scale and money. That’s why the question around Big Cannabis still largely revolves around whether these companies will grow to a profitable scale before they run out of money.
On those terms, the stocks are very, very different. All of them have plenty of cash to keep them afloat for what could be years before the businesses grow to the point where they break even.
But some companies have more wiggle room to cope with setbacks and delays. Tilray Inc. (NASDAQ:TLRY), for example, is widely cited as facing insolvency if it can’t flip to profitability by mid-2021.
I agree that weighing any growth curve against a dwindling pool of cash is always a risky venture. If growth hits a wall or the burn rate accelerates, you’re in trouble.
However, Tilray is currently on track to spend $130 million more than it will take in over the next 18-20 months. This is only staggering until you remember that there’s $220 million in the bank and another $147 million in tangible assets on the balance sheet.
During that time frame I expect sales to at least double. By that point, the company will be generating $40 million a quarter and all management needs to do is to maintain its established market share.
Of course, 18-20 months is a long time for some investors to wait on what is still an unproven proposition. And Tilray is also carrying $430 million in debt, so it’s not my first choice in terms of sustainability.
Aurora Cannabis Inc. (NYSE:ACB) is a little better. The math is similar, with $315 million in cash stacked against what could be at least $255 million in future capital drain.
Like Tilray, Aurora is carrying significant debt. But those loans are secured by bigger tangible assets like land, greenhouses and a full $165 million in unsold inventory. Barring absolute disaster, Aurora is built for the long haul.
Then there’s Canopy Growth Corp. (NYSE:CGC), which is sitting on a staggering $4.5 billion in cash, $1.1 billion in assets, $340 million in inventory and another $475 million in strategic investments in other companies.
Even after subtracting the debt, Canopy is barely trading at 2X book value. While it’s going to need to spend at least $900 million growing to a profitable size, there’s more than enough money here to make that happen.
One way or another, Canopy is going to be around for years to come. If you’re looking for the most “mature” player in the group, this is it.
Or you can always go with the company that’s already generating profit without needing to burn cash. That’s Aphria Inc.(NYSE:APHA), a key component of my Turbo Trader Marijuana Millionaire Portfolio.
It’s there for a reason. I’d rather capture strength first and then move up the risk curve after that. Even so, there’s significantly risk in the group than people suggest.