At the start of this month, things were getting really dicey for Tilray (NASDAQ:TLRY), a major cannabis operator. The shares seemed to be in free-fall. Since hitting a high of $300 in late 2018, Tilray stock dropped to the low $30s.
It’s true that volatility is fairly normal for high-flying cannabis stocks. Yet the plunge of TLRY was much more severe than its peers. The sentiment had gotten downright awful.
But yes, this really was a bottom for TLRY stock, at least temporarily. Keep in mind that the shares are now at about $48.
Interestingly enough, the main reason for this is not about changes in the fundamentals. The Tilray news that triggered the excitement was mostly about the supply-and-demand dynamics of the stock. The company’s largest shareholder, Privateer Holdings, signed a non-binding letter of intent to extend the lock-up provision on its 75 million shares to two years.
A Closer Look at Tilray Stock
Granted, this is not a guarantee, as Privateer certainly wants some flexibility, but the new arrangement is still important. It should prevent an avalanche of Tilray stock from flooding the market and is also a vote of confidence for the company’s long-term prospects.
So it’s reasonable for the shares to have a nice rally. This was also likely propelled by the heavy short interest in the stock (by the end of May, it was at a hefty 30%). In other words, short sellers had to buy shares to cover their positions – which resulted in even more appreciation.
But such things are really temporary. When it comes to cannabis stocks, the main focus is on the growth and market share gains.
Unfortunately, there are some concerns for TLRY. For example, when it comes to cannabis production, the company relies primarily on third parties. While this provides more flexibility, it also weighs on gross margins and can make it difficult to fill demand.
It also does not help that the average selling price per gram has been declining in the Canadian market, going from $5.94 to $5.60 in the latest quarter. The fact is that black market operations remain a persistent problem. To put things into perspective, TLRY sold 3,012 kilograms in Q1 while Canopy Growth (NYSE:CGC) sold 10,102 kilograms.
Now M&A will be critical to help boost production. Note that TLRY’s acquisition of Manitoba Harvest was evidence of this (adding $5.6 million in sales for the quarter).
But the company is limited in terms of its balance sheet, at least compared to rivals like CGC and Cronos Group (NASDAQ:CRON). These companies have raised billions from strategic partners like Constellation Brands (NYSE:STZ) and Altria Group (NYSE:MO). By doing this, they have the fire-power to successfully bid on marquee assets.
TLRY, on the other hand, has been tentative with its partnerships, such as with Novartis (NYSE:NVS) and Anheuser Busch Inbev (NYSE:BUD). But this strategy could prove very limiting.
Bottom Line on Tilray Stock
At the Stifel 2019 Cross Sector Insight Conference, Tilray CEO Brendan Kennedy and CFO Mark Castaneda had some interesting things to say about the cannabis market.
First of all, they noted that there would be a doubling of countries that legalize medical cannabis during the next two years (there are currently 41 countries). Next, three counties will legalize the recreational use of marijuana during this period of time.
But Kennedy and Castaneda also said that the global market will ultimately have a handful of major winners. After all, there will need to be a major scale to compete on pricing.
All in all, I think this analysis is spot-on. Yet this is not mean that Tilray will be among the winners. Again, the company has not been aggressive with its funding, and this could mean losing out on early-stage opportunities.
In other words, for investors looking at cannabis plays right now, I think CGC and CRON are better options.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
