In late July, cannabis company Tilray (NASDAQ:TLRY) went public at $17 per share. Today, exactly two months after its IPO, Tilray stock crossed above $200 and is showing no signs of slowing. As of this writing, stock in Tilray is closing in on $240.
That is a fourteen-fold increase in two months. To put that in perspective, let’s assume you invested $10,000 at the $17 IPO price. That stake would be worth more than $140,000 today.
Some people have been that successful with this stock. Legendary venture capitalist Peter Thiel is one of them. Privateer Holdings, a private equity fund backed by Thiel, holds a 76% stake in TLRY stock, meaning the fund has made billions of dollars over the past two months. There are also likely a handful of other TLRY loyalists who have made an absolute killing over the past few weeks.
If you are one of those investors, congratulations. From July 2018 to September 2018, Tilray stock has been arguably the best trade of the decade.
But, I’m not sure how many more huge winners there will be on the long side of this trade. At current levels, the valuation on Tilray stock makes no sense. Granted, this stock hasn’t cared about valuation for more than half of its epic rally. But, eventually, fundamentals matter.
When it comes to hyper-momentum stocks like TLRY, it is nearly impossible to predict when the fundamentals will start to matter. But, don’t be fooled, this is no exception. Fundamentals always eventually matter, and when they start to matter in Tilray, you could see this stock drop by a whole bunch.
How Tilray Stock Got Here
Tilray stock has been on fire recently due to what the market perceives as multiple operational tailwinds.
First, peer cannabis company Canopy Growth (NYSE:CGC) received a huge $4 billion investment from alcoholic beverage giant Constellation Brands (NYSE:STZ). That got the ball rolling in the cannabis craze because it signaled that big money was starting to move into the space. Tilray stock jumped on that news.
Then, Tilray received approval from regulators to ship medicinal marijuana to Germany, yet another sign of Tilray’s growing presence on the global cannabis stage. Tilray stock jumped on that news. Shortly thereafter, Tilray announced that it had received U.S. DEA approval to import a cannabinoid study drug into the U.S. from Canada for research at UCSD. Tilray stock jumped on that news, too.
And, earlier this week, Tilray CEO Brendan Kennedy appeared on Jim Cramer’s TV show, Mad Money, where he hinted at more big investments coming to the cannabis space. TLRY stock jumped after that interview, and now trades at $240.
So, how does a stock go from $17 to $240 in eight weeks? A big investment, a bunch of speculation, a ton of hype, a few landmark deals, and mainstream publicity.
What the Fundamentals Say About Tilray
Tilray is now being valued at $20 billion. To put that in perspective, this company, which is slated to do $40 million in sales this year, has a market cap that is nearly twice as big as Macy’s (NYSE:M) and Nordstrom (NYSE:JWN), both of which are projected to do more than $15 billion in sales this year.
Needless to say, the fundamentals don’t support a $20 billion valuation for Tilray stock. But what do they support?
According to Constellation Brands, which has presumably done a ton of homework on this industry, the global cannabis market will be worth $230 billion in roughly 15 years. The total revenue available to suppliers will be about $140 billion by then. And, they also estimate that operating margins for suppliers have an opportunity to be roughly 35% at scale.
Best case scenario for Tilray is that this company dominates the cannabis market at scale (~15% market share), and that margins grow to 35% levels. In a best case scenario, then, in 15 years Tilray could have $21 billion in revenues and $7.4 billion in operating profits. Taking out 20% for taxes, Tilray could have $5.9 billion in net profits in 15 years.
Anheuser-Busch (NYSE:BUD), the world’s largest alcoholic beverage stock, trades at 20X forward earnings. A 20X multiple on $5.9 billion in net profits implies a 14-year forward valuation of $118 billion. Discounted back by 10% per year, that equates to a year-end valuation target for Tilray stock of $34 billion.
Worst case scenario for Tilray is that this company becomes an after-thought in the cannabis market as more and bigger competition arises. In that scenario, market share will likely be 2% or less, and margins will struggle to get above 20%. Doing the same math as above, that leads to net profits of $450 million in 15 years. A 20X forward multiple implies a 14-year forward valuation target of $9 billion. Discounted back by 10% per year, that equates to a year-end valuation target for Tilray stock of $2.6 billion.
Even if you assume 50/50 odds here, then a reasonable market cap for Tilray stock today is ~$18 billion, below today’s $20 billion market cap. But, the odds of Tilray succeeding considering the number of unknowns in this industry are far worse than 50/50, and Tilray stock is reasonably worth much, much less than $20 billion today.
Why Tilray Stock Could Head Higher
The fundamentals say that because of uncertainties and risks in the young and rapidly changing cannabis market, Tilray stock isn’t worth $20 billion today.
But, the market doesn’t care. This is a hyper-growth momentum stock with a great story and tons of hype. Stocks like that tend to ignore fundamentals for a long time, and head higher regardless of what value investors say.
But, the day of reckoning for all hyper-growth momentum stocks eventually comes. And, when it does, the company either has to support its valuation with fundamentals, or the bubble pops.
I’m not sure when that day will come for Tilray stock. But, when it does, there won’t be fundamentals there to back up a $20 billion-plus valuation today, and Tilray stock will drop like a rock. Until then, though, this stock will head higher.
Bottom Line on TLRY Stock
The cannabis market will be huge. But, investing in Tilray stock at these elevated prices is playing with fire.
As of this writing, Luke Lango was long CGC.
