It’s tough to find cannabis stocks with reasonable valuations nowadays. But, hey, when it comes to Tilray (NASDAQ:TLRY), the share price is certainly much more interesting. During the past year, TLRY stock has been chopped from $300 to below $60.
If nothing else, this shows how volatile the category is.
Yet despite the plunge, TLRY stock is still sporting a market cap of $5.74 billion. And yes, the valuation is far from cheap, such as in terms of the price-to-sales multiple. It’s at over 130x!
Now it’s true that TLRY stock is among the premier operators in the industry. Consider that the company has a global platform, with presence in countries like Australia, Germany, the U.K., South Africa, Chile, Argentina and, of course, Canada.
Tilray stock also has the benefit of an experienced management team, which has shown a penchant for aggressive deal making. In fact, they have been savvy in creating partnerships and acquiring companies to gear up for the CBD opportunity that is likely to see lots of growth in the U.S. The reason is the passage of the farm bill that has taken CBD compounds off the illegal substance list.
While all this is great, there are still some nagging issues for Tilray stock. None are reasons on their own to avoid the shares. However, I think there are better alternatives like Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC).
What are some of the problems with Tilray stock? Let’s take a look at two that stand out:
Small Deals Highlight Scale Concerns
While the cannabis market holds enormous potential, the winners will likely need significant scale. Part of this will be to have a large base of production — allowing for economies of scale — as well as having the resources to create branded products.
CRON and CGC have entered multi-billion dollar partnerships with mega operators like Constellation Brands (NYSE:STZ) and Altria Group (NYSE:MO). These deals have been more than just money. They also have the advantages of leveraging existing distribution channels, brands and consumer products expertise.
Tilray, however, has only struck small deals, albeit with big names, such as with Anheuser-Busch Inbev (NYSE:BUD) and Novartis (NYSE:NVS). Small deals could prove to be a limiting factor as the company may not have the resources to compete against its fierce rivals.
Can’t Meet Canada Demand on Its Own
Right now, the mega-growth opportunity is in Canada, as the country legalized cannabis for recreational use in October. The result is that Tilray has gotten supercharged. In the fourth quarter, revenues soared by 203.8% to $15.5 million.
But there is a problem: Production has not been impressive. For Q4 the company reported 2,053 kilos, far below its major peers. CGC pumped out more than 10,000 kilos and Aurora Cannabis (NYSE:ACB) brought forward more than 7,000 kilos. Keep in mind that Tilray was not even in the top four in the market.
To make up for the shortfall, the company has been relying on third-party providers. That’s gotta put a squeeze on margins.
Here’s what CEO Brendan Kennedy had to say on the latest earnings call: “The United States and European markets are orders of magnitude larger than Canada. So, while Canada will continue to be an important market for us, we expect to focus the majority of future investments on the U.S. and Europe. We will not purchase or invest in what we believe to be overpriced supply assets in Canada, which we believe will erode in value in the medium to long term, as the market normalizes.”
In the meantime, Tilray stock value continues to erode, having lost 57.5% since Canada legalization as compared to a 7.84% decline for ETFMG Alternative Harvest ETF (NYSEArca:MJ), which counts TLRY stock as its fifth-largest holding of a 33-name portfolio.
Kennedy approach may be the right one. But it could mean that Tilray will see decelerating growth, as it will take time to ramp up in the U.S. and European markets.
TLRY stock investors may not be willing to wait around.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
