Everyone wants in on the pot stock boom, and with good reason. This is a $500 billion-plus global industry in the making, and the growth narrative is till in the top of the first inning. As such, it seems that a lot of investors are just rushing to buy any and all marijuana stocks. But when it comes to pot stocks, quality still matters. And, when it comes quality, Tilray (NASDAQ:TLRY) stock is lagging its peers.
Tilray stock is most famous for being the first stock to go parabolic in the pot stock boom. Following a multi-billion dollar investment from alcoholic beverage giant Constellation Brands (NYSE:STZ) into Canadian cannabis giant Canopy (NYSE:CGC) in 2018, all pot stocks jumped. But none jumped like TLRY, which went from $20 to $300 in a month on nothing more than speculation and hype.
That speculation and hype has since calmed. And Tilray stock has dropped. Now, some investors are thinking that this drop is an opportunity to “buy the dip”.
But as Wall Street investment firm Jefferies pointed out recently, there are still some risks with buying Tilray stock here. Specifically, Jefferies just slapped an Underperform rating on Tilray stock, citing IP, valuation, share structure, capacity and expansion risks. I agree with that list of risks and would like to add that Tilray also lacks the financial resources of its peers.
As such, when it comes to pot stocks, quality matters, and Tilray stock doesn’t have that quality just yet. It may get there soon. But not today, meaning investors looking to play the pot stock boom are best sticking with CGC stock.
The Growth Narrative Has Risks
The Tilray growth narrative is good. Broadly speaking, the company is well positioned in the global medical cannabis market and projects to one day be a big player in what management estimates will be a $150 billion global market. The management team is experienced. Growing capacity is large. The distribution footprint is global. Margins are healthy. And the company appears to be well on track to winning and growing share in Europe.
But the narrative is far from great. There are multiple risks here. The biggest of those risks is a lack of financial resources to fund growth and compete at scale.
Right now, most investors are playing the pot stock boom through the Big 4 Canadian cannabis companies: Tilray, Canopy, Cronos (NASDAQ:CRON), and Aurora (NYSE:ACB). Two of those Big 4 pot stocks have scored multi-billion dollar investments from global consumer staples giants. Tilray is not one of them.
Specifically, Canopy and Cronos have scored multi-billion dollar investments from Constellation Brands and Altria (NYSE:MO), respectively. Those investments have shored up each company’s balance sheet, as well as given them billions of dollars to fund growth-related initiatives, including R&D and operational expansion.
As of last quarter, Tilray has a net cash balance of roughly $100 million. Thus, Tilray is at a significant disadvantage when it comes to funding growth-related initiatives. That’s a big deal considering the cannabis market today is all about grabbing share, expanding reach, and developing IP. Canopy and Cronos have ample resources to do that. Tilray does not.
As such, the long-term growth narrative underlying Tilray stock — while good — lacks clarity. So long as that narrative lacks clarity, Tilray stock will have a tough time staging sustainable rallies.
TLRY Valuation Is Reasonable, But Not Discounted
The biggest knock against Tilray stock over the past several months has been valuation. During that stretch, Tilray stock has been stubbornly overvalued relative to its pot stock peers, and as such, was never worth buying from a valuation standpoint alone.
That has changed recently as Tilray stock has continued to drop. Today, Tilray stock actually trades at a relatively in-line cannabis valuation. Specifically, TLRY stock trades at around 20x one-year forward sales, which is roughly in-line with CRON stock, and slightly below CGC stock.
That being said, the valuations in CRON and CGC stock deserve to be inflated given their enormous financial resources. TLRY stock doesn’t have those resources. Instead, it’s much more in the Aurora boat, and ACB stock trades at just 12x one year forward sales.
Thus, one could make the argument that TLRY stock is still overvalued. If you think Tilray will score a big investment in 2019, then the stock is reasonably valued. But it’s tough to say that the stock is undervalued relative to peers.
The Bottom Line on TLRY Stock
The cannabis industry will be huge, and it will birth multiple big winners. But investors should keep in mind that many of those future winners aren’t public yet. Many of them probably haven’t even been founded yet. Thus, even though 2018-19 has turned into a pot stock gold rush, investors should still be mindful of investing only in top quality pot stocks.
Right now, the best quality pot stock is CGC. Until that changes, there’s no reason to buy Tilray stock.
As of this writing, Luke Lango was long CGC.
