Over the course of less than 12 months, Canadian cannabis producer Tilray (NASDAQ:TLRY) went from most-loved marijuana stock to most-hated marijuana stock. In late 2018, Tilray stock went from $20 to $300 in a matter of weeks, and TLRY quickly transformed into the face of the cannabis craze.
Since then, Tilray’s news has been almost completely negative, and TLRY presently trades hands around $40, despite many other pot stocks trading near their all-time highs.
Tilray stock, though, did stage a small relief rally in June. Tilray stock ran up from $35 to $45 in a few trading days after the company inked a deal with its largest shareholder, Privateer Holdings, in which Privateer agreed to extend the lock-up period for its 75 million common shares of TLRY for up to two years.
The market interpreted this deal as good Tilray news for two reasons. First, it means 75 million shares of TLRY won’t flood the supply-side of the float for another two years. Second, it means Privateer believes in the long-term value of TLRY, despite the stock’s big fall from grace over the past several months.
As a result, TLRY stock has rebounded in a big way since the good news for Tilray was announced.
But further gains by Tilray stock after that boost from the lock-up extension are likely to be limited. There aren’t any big catalysts on the horizon for the company, nor is TLRY all that cheap relative to its peers or its long term growth fundamentals. Consequently, the bull thesis on TLRY stock lacks conviction and firepower, meaning investors should avoid it for the foreseeable future.
No Visible Catalysts on the Horizon
The large rally by Tilray stock in early June was the result of a lock-up -extension catalyst. While TLRY has multiple, potential, positive catalysts, none of them looks likely to materialize anytime soon.
One potential catalyst is a large investment by a consumer-staples giant. Such a big-money investment would be a vote of confidence. It would also shore up TLRY’s balance sheet and give Tilray the financial firepower to compete with its better-funded peers, Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON).
TLRY could also report strong quarterly results. Tilray’s growth rates were impressive last quarter. But they were broadly in-line with the numbers reported by its peers, meaning it isn’t gaining share in the Canadian cannabis market. If Tilray’s Q3 results improve and surpass those of its peers, investors will believe that it is gaining market share, making them more upbeat on Tilray stock.
In the foreseeable future, TLRY stock could also benefit from some upgrades by Wall Street analysts, and/or favorable progress on the U.S. cannabis legislation front.
Unfortunately, it’s not clear whether any of those catalysts will occur. There hasn’t been any information about TLRY being poised to receive a large investment, and it increasingly appears as though the large investments in the cannabis sector have already been made.
Further, Tilray just reported its quarterly numbers, and its next report isn’t due for a few months. At the same time, Wall Street analysts don’t like TLRY stock (they have an average rating of “hold” on it), and Tilray doesn’t have much exposure to the U.S. cannabis market.
Valuation Isn’t Attractive
Without any visible catalysts on the horizon, the only other thing that could lift Tilray stock further is valuation. But the stock’s valuation isn’t low enough to provide a positive catalyst.
Relative to peers, Tilray stock seems fairly valued. The stock’s valuation is equivalent to around $1.3 million per every kilogram of cannabis sold last quarter. The median valuation of Tilray, Canopy, Cronos, and Aurora (NYSE:ACB) is also roughly $1.3 million per every kilogram of cannabis sold last quarter. Thus, TLRY stock’s valuation is in-line with its peers’ valuations.
Tilray stock also seems fairly valued based on its fundamentals. Most research indicates that the global cannabis market will one day be worth around $200 billion. In the fourth quarter of 2018, the legal Canadian cannabis market was around $150 million. Tilray’s revenues in that same period were around $15.5 million, implying 10% market share.
That market share will fall over time as more and more competitors enter the space. It will almost certainly settle below 5%, and will likely be somewhere closer to 2.5%. Also assuming the worldwide legal cannabis market grows to $200 billion, TLRY’s long-term revenue potential would equate to $5 billion. Tilray’s operating margins will likely settle somewhere around 20%-30% (in-line with those of the alcoholic-beverage market). That would produce about $1.25 billion in operating profits, or $1 billion in net profits for Tilray, assuming a 20% tax rate.
Based on a price-earnings multiple of 16, which is average for the market, the long-term valuation target of Tilray stock would be $16 billion under that scenario. It will probably take Tilray upwards of 15 years to get to that point. After taking off 10% per year, that equates to a 2019 valuation target of just under $4 billion. That’s pretty much exactly where Tilray’s market cap sits today.
The Bottom Line on TLRY Stock
Marijuana stocks are great long-term investments. But investors should buy high-quality marijuana stocks, and they should buy cannabis stocks at the right price. Right now, it still remains to be seen whether TLRY stock is a high-quality pot stock. At the same time, the price of the stock seems fair, but not all that compelling.
All in all, then, TLRY stock should be avoided at this point. I continue to think CGC and ACB are the two best pot stocks to buy now.
As of this writing, Luke Lango was long CGC and ACB.