Why Tilray Stock Isn’t Worth $100

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Cannabis mania is in full swing, and the stock that is creating the most hype is Tilray (NASDAQ:TLRY). Seven weeks ago, Canadian cannabis supplier Tilray went public at $17 per share. Today, Tilray stock trades at well over $100, a 600% increase in seven weeks. If that isn’t pure mania, I don’t know what is.

Bulls are pounding on the table, saying that this is just the beginning. They say that the $12 billion valuation of Tilray stock dramatically undervalues the enormous upside potential inherent in the legal cannabis market, which will one day be as big as the alcoholic beverage market. The alcoholic beverage market has produced multiple $50 billion-plus companies, including one $170 billion company. According to the bulls, Tilray stock is in line to get that sort of valuation several years down the road, meaning this rally is still in the first inning.

Bears don’t agree. They say that a $12 billion valuation for Tilray stock makes no sense, since the company is slated to generate less than $160 million of revenue next year. Even though the cannabis market will be huge, the current valuation of Tilray stock is premature and overly optimistic considering how far we have to have to go between now and the peak global cannabis market, the bears say. Maybe Tilray stock will one day be worth $50 billion or more, but the current valuation prices a high probability of that happening, when the reality is that there is a very low probability of that scenario materializing, the bears believe.

Who is right?

The bears. The bullish argument makes sense… if you ignore competition risks, execution risks, legislative risks, and the fact that money is worth more now than far into the future. The aforementioned bear thesis, meanwhile, incorporates those risks.

When all of the factors are weighed, it’s clear that Tilray stock isn’t worth $100 today.

This Is How Big TLRY Could Be

Let’s do some math.

Constellation Brands (NYSE:STZ) just invested $4 billion in leading cannabis company Canopy Growth (NYSE:CGC), so STZ knows a thing of two about the potential upside of the cannabis market. It pegs the global addressable cannabis market at ~$230 billion, and estimates that the total revenue available to suppliers is about $140 billion. It estimates Canopy Growth’s potential share of that market at 5%-15%. If Canopy can obtain a 15% share, it will generate just over $20 billion of annual revenue That is within the range of the revenue of large alcoholic beverage companies, which is between a few billion and Anheuser-Busch’s (NYSE:BUD) $55 billion.

In a best-case scenario for Tilray stock, Tilray unseats Canopy Growth and becomes the dominant player in the global cannabis market. In that scenario, TLRY would have a market share of about 15%, or $21 billion of annual revenues.

Let’s also aggressively assume the best-case scenario when it comes to profit margins. According to Constellation Brands, Canopy Growth has an opportunity to scale its operating profit margins towards 40%. Let’s say Tilray can do the same. A 40% operating profit margin on $21 billion of revenue implies $8.4 billion of operating profits. Taking out 20% for taxes, you are left with net profits of $6.7 billion.

BUD stock has a forward price-earnings multiple of around 20. Apply that same multiple to Tilray, and you get a potential best-case-scenario market cap of $134 billion.

Tilray’s market cap is just $12 billion today. Naturally, then, you can see where all the optimism comes from.

Why Tilray Stock Isn’t Worth $100 Today

Tilray could be huge. But that doesn’t mean you should buy Tilray stock today.

What are the odds that Tilray’s market cap reaches $134 billion? Very slim. TLRY is one of the leading cannabis companies right now, but the market is so new and changing so rapidly that being a top player right now doesn’t guarantee top status in several years. Also, competition in the cannabis market is growing, and as cannabis is legalized in major markets like the U.S., the competitive landscape will become more intense.

In other words, a lot will change between now and when the cannabis market peaks. All that change creates a lot of uncertainty, so the chances of Tilray stock achieving a $134 billion market cap aren’t that high. The chances are way less than 50%, and they are probably closer to 10% or less.

Even if Tilray does attain a market cap of $134 billion, it will take a long time to get there. Constellation’s forecast was based on its estimates for 15 years from now. I actually think the cannabis market can grow more quickly than Constellation thinks, aided by favorable legislative trends. All things considered, I think Tilray could attain a market cap of $134 billion in ten years.

Now, let’s do some more math.

Let’s assume it is a sure thing that the market cap of Tilray stock reaches $134 billion in a decade. Discount that back by 10% per year, and you get a present value of roughly $50 billion. But, as discussed earlier, it’s far from a sure thing that Tilray stock’s market cap will reach $134 billion. The odds of that happening are 10% or less.

Apply those odds to a $50 billion present value, assuming the alternative is that the company goes bust. You get a present value of $5 billion, or less than half of the current market cap of Tilray stock.

Bottom Line on Tilray Stock

The cannabis market is going to be huge. There will be a lot of pot stocks that zoom way higher over the next several years, and this is an industry you want exposure to.

But Tilray stock isn’t the type of exposure you want right now. Maybe Tilray stock will go to $1,000. Maybe it will go to $0. Nobody really knows because this market is too young and changing too rapidly for anyone to be 100% sure of anything. This is especially true for Tilray, which doesn’t have a big partner like its chief rival, Canopy, does.

The surest bet in the cannabis market right now is Canopy, and that is because it has received a $4 billion investment from one of the world’s leading alcoholic beverage companies. Moreover, Canopy has been the industry’s largest company for several years. If you want exposure to the cannabis market, I say forget TLRY and stick with Canopy.

As of this writing, Luke Lango was long CGC.  


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/why-tilray-stock-isnt-worth-100/.

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