Marijuana stocks are high right now … too high. Ever since beverage giant Constellation Brands (NYSE:STZ), the company behind Corona beer, invested $4 billion into leading cannabis player Canopy Growth (NASDAQ:CGC), marijuana stocks have been on the fire.
Everyone in the cannabis space from Canopy Growth to Aurora Cannabis (OTCMKTS:ACBFF), CV Sciences (OTCMKTS:CVSI) and MariMed (OTCMKTS:MRMD) has been in major rally mode. But, the one stock that has rallied the most amid recent pot stock mania is Tilray (NASDAQ:TLRY). Mostly due to its status as the first cannabis company to raise capital via a Nasdaq list, a long list of reputable institutional investors and a bullish call from Citron Research, Tilray stock has gone from a $17 IPO price in late July to over $75 today.
That is a huge 340% rally in just over a month. Needless to say, TLRY stock has come too far, too fast. At current levels, investors would be wise to fade the rally.
The Growth Narrative for Tilray Stock Is Promising
When looking at Tilray stock both in a near- and long-term window, the bull thesis actually looks pretty good, so long as you don’t pay any attention to valuation.
The near-term bull thesis for stock in Tilray is pretty simple and reasonable. The huge investment from Constellation Brands shows that big money is moving into this space. That big money is moving into pot stocks ahead of what promises to be a game-changer for this industry in Oct. 2018, when weed will be completely legal throughout Canada. As such, over the next two months, you could see more big money move into other pot stocks, a catalyst which could send these stocks flying.
TLRY stock could easily be one of the stocks that gets a big investment, mostly because of its Nasdaq listing and supposedly long list of “blue chip investors.”
The long-term bull thesis on Tilray stock is also pretty simple and reasonable. The medical and recreational cannabis markets globally have huge growth potential. Underlying data suggests that at ages when both drinking and alcohol are illegal (U.S. high school students under 21), alcohol consumption rates are only narrowly higher than cannabis consumption rates. The trend indicates that the two could be equal soon.
Thus, in a world where the two are completely legal, one could reasonably assume that the cannabis and alcoholic beverage markets will be equal in size. The alcoholic beverage market was valued at $120 billion in the U.S. alone last year, and over $1 trillion globally.
Thus, it is safe to say that Tilrary stock is knocking on a trillion dollar opportunity.
TLRY Stock Has Come Too Far, Too Fast
Although the global cannabis market promises to be huge, pricing in all that growth today is unnecessarily speculative and risky.
No one really knows who will win in the cannabis market, or exactly how the winning will happen. In the alcoholic beverage market, the market has consolidated around a few huge winners. The same will likely happen in the cannabis market. In five to ten years, there will probably be two to five huge cannabis companies, and some of them will likely be absorbed into bigger consumer goods companies.
Will Tilray be one of those big winners? It is really, really hard to tell today. Actually, it is nearly impossible to tell today whether TLR will be a giant in this industry in five to ten years, given the amount of uncertainty regarding how this industry will look in the future.
But, the current valuation seems to reflect market dominance down the road. Tilray stock trades at over 200X trailing sales. The only other marijuana stock in this article that trades above 100X trailing sales is Canopy Growth, the company that already has a big investment from Constellation Brands. Outside of that, all other pot stocks in this article trade below 100X trailing sales.
Also, Tilray’s current market cap is $7 billion. Considering Pepsi (NYSE:PEP) just bought SodaStream (NASDAQ:SODA), an established beverage company with $500 million-plus in sales and healthy profit margins, for $3.2 billion, it is really tough to see anyone in the industry paying more than double that for a company with $20 million in sales last year and negative profit margins.
Bottom Line on TLRY Stock
The cannabis market promises to be huge, and some cannabis stocks will emerge as big long-term winners.
But, outside of Canopy Growth, which has a $4 billion investment from Constellation Brands, picking long-term winners today is akin to throwing darts in the dark. From this perspective, the big rally in Tilray stock has come too far, too fast and it’s time for this stock to cool down and come back to reality.
As of this writing, Luke Lango was long CGC.