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Tilray Could Fall to $50 and Still Be Overvalued

Tilray stock - Tilray Could Fall to $50 and Still Be Overvalued

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Late September, market participants bought up shares of cannabis suppliers ahead of its legalization in Ontario, Canada. Of all the stocks in this space, Tilray, Inc. (NASDAQ:TLRY) stands out the most because the stock touched an intraday high of exactly $300.00, only to give up as much as two-thirds of that in the next few sessions. Tilray stock has regained some that since.

More recently, the company reported a few news items that it hoped would justify its still-lofty valuation. Bad news for TLRY though, they didn’t.

Latest Development for Tilray Stock

On Sep 26, Supreme Cannabis Company’s 7ACRES signed a deal to supply $12 million CAD worth of product to Tilray. Over the course of 12 months, Supreme Cannabis will supply dried cannabis, which Tilray will then use to sell through its medical distribution platform. The deal, worth $9.3 million in U.S. currency, pales in magnitude in comparison to Tilray’s market cap. Even if the company were to sell this at, say, a five-times mark-up, net of operating costs, the $45 million in potential revenue would value this deal at around 45 times sales.

TLRY stock currently trades at a P/S (price to sales) of over 700 times, so this deal is an improvement over that. But in the mean time, Canopy Growth Corporation (NYSE:CGC) trades at a 150 times P/S. And investors could play pot at a much better value by buying Constellation Brands, Inc. (NYSE:STZ), whose P/S is 5.3 times. Constellation, which owns Corona, Robert Mondavi, and Ballast Point, invested $4 billion in Canopy Growth Corp. this past August.

Negative Developments for TLRY

On Oct. 2, PepsiCo, Inc. (NASDAQ:PEP) CFO Hugh Johnston said the company had no plans to invest in marijuana. Pepsi’s biggest issue with investing in this space at this time is that marijuana is not legal everywhere. In the U.S., which is potentially one of the largest markets for the product, it is only legal in some places but not all.

Pepsi’s remarks bring bad news for weed investors, especially for those who wanted Tilray to ink billion-dollar deals that would justify its share price.

After the market close on October 3, Tilray announced a $400 million Notes offering. The company said that it “intends to use the net proceeds from this offering for working capital, future acquisitions and general corporate purposes, and to repay the approximately $9.1 million existing mortgage related to its facility in Nanaimo, British Columbia.”

The debt sale is a reminder to investors that Tilray stock trades at unfavorable debt/equity levels of 1.55 times. TLRY has no positive income and revenue is sparse. Speculators just point to the potential sales ahead but until the company starts reporting such figures, the stock is at risk of a major fall.

Chances are high that this debt sale is happening at a time when its shares are hyper-inflated. While the stock benefits from a lock-up that prevents the sale of shares until January, those three months will arrive soon. And when it does, selling pressure on shares may accelerate. Short float is currently 5.85%.

The Bottom Line for Tilray Stock

Based on the two analysts offering a price target on Tilray stock, the price target is $34. As of this writing, TLRY trades at 150.

If Tilray were to fall by two-thirds — to $50, the stock would still trade at lofty levels. Investors should wait for the legalization of marijuana in Canada to come to effect first. Once revenue starts rolling in for Tilray, analysts may number crunch and arrive at fair value for the stock. At today’s price, TLRY stock is trading at unknown valuations that do not adequately reflect the risks ahead for the company.

As of this writing, Chris Lau held no positions in the aforementioned securities.

Article printed from InvestorPlace Media,

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