Because of legal restrictions, its tough to find cannabis investments on traditional stock exchanges. But of course, things are getting … more relaxed.
Case in point: Cannabis producer Tilray, Inc. plans to list 9 million shares on the Nasdaq. The price range is $14 to $16 and the lead underwriters include Cowen, Roth Capital and Northland Capital Markets.
Founded in 2014, Tilray is still a fairly small company. For the 12 months ended March 31st, 2018, the sales came to $23 million. So if the deal is priced at the mid-point of its range, the price-to-sales multiple will be hefty 11x.
What Is Tilray?
Tilray is based in Canada, which has been at the forefront of the cannabis revolution. The company was one of the first to obtain its license from Health Canada to cultivate and sell the plant for medical purposes. Tilray is also a licensed dealer.
Because of its headstart, Tilray has been able to greatly expand its distribution footprint. Note that the company’s offerings are available in Argentina, Australia, Canada, Chile, Croatia, Cyprus, the Czech Republic, Germany, New Zealand and South Africa.
But the Tilray IPO is more than just about timing. The company has been making heavy investments in R&D. Tilray has made innovations in terms of delivery, the supply chain, the production of precisely formulated cannabinoid products and the development of systems to scale manufacturing.
For example, Tilray has the exclusive rights to 20 issued and pending patents. There is also a strong platform for conducting clinical trials. One of its production facilities has been certified for Good Manufacturing Practices (GMP), which is based on the requirements of the European Medicines Agency (EMA).
And yes, another key driver for the Tilray IPO is the market opportunity. Based on research from the United Nations, the global market for cannabis is currently $150 billion and nearly 4% of the adult population uses the drug — and these numbers are only going to go up from here.
More importantly, there are major shifts in attitudes. In the coming years, there will likely be more countries that will legalize cannabis — which will expand the market size.
Why Is It Time for a Tilray IPO?
The IPO itself will provide some major advantages for Tilray. Of course, it will mean raising a large amount of capital so as to continue with the investments in R&D and distribution.
But since the cannabis market is still in the early stages, the IPO should help provide a strong branding event for the company. If anything, it will be another important step to legitimize the industry — showing that it is not on the fringes.
OK then, so how might the IPO fare? Well, there are certainly notable risk factors. Even though the regulatory environment is getting more favorable, the progress is likely to be choppy. What’s more, the competitive environment is getting much more intense. Keep in mind that there are hundreds of cannabis licenses being processed in Canada. There is also the issue of illegal and unlicensed operators.
And finally, Tilray is incurring substantial losses. In 2016, the net loss came to $7.9 million and the net loss for last year was $7.8 million. The accumulated deficit is $45.6 million.
Now while all these are serious issues, I still think they still probably won’t matter too much. For the most part, there remains strong interest in the cannabis opportunity. It also helps that the IPO market has been robust this year, as seen with deals like Docusign Inc (NASDAQ:DOCU), Zscaler Inc (NASDAQ:ZS) and Avalara Inc (NYSE:AVLR).
And yes, Tilray IPO does offer an easy way for investors to play this trend. In other words, it seems like a good bet that the offering will get a bullish reception.
Tilray is expected to go public in July.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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