Over the last few months, Tilray (NASDAQ:TLRY) appears to have broken from its downward trend. With a large shareholder choosing to keep stock in lock-up, a lower than anticipated supply of shares helped to propel Tilray stock.
Unfortunately, with little else to provide a catalyst, the recent move higher looks like a temporary interruption in its decline from the bubble territory of last September.
TLRY Began to Recover in June
I have long urged investors to avoid Tilray stock. Back in April, when the stock traded at about $60 per share, I reiterated this advice as lockouts preventing insiders from selling had expired. By early June, TLRY had fallen into the mid $30s per share level.
Since then, it has seen a slight recovery and currently trades at around $47 per share. As our own Tom Taulli mentioned, TLRY seems to have traded on the overall supply of available shares.
The Tilray news that probably helped it move up revolved around Privateer Holdings. Privateer, Tilray’s largest shareholder, agreed to extend a lock-up provision on 75 million shares to two years.
Despite this recent recovery, the stock still has fallen more than 84% since the $300 per share high of last September. Year-to-date, it has lost nearly one-third of its value. Even after that steep drop, TLRY still trades at about 80 times sales.
This does not make Tilray stock unique among marijuana equities. Canopy Growth (NYSE:CGC) sells at about the same price-to-sales (PS) ratio. It might even look inexpensive compared to the approximate 338 PS ratio of Cronos Group (NASDAQ:CRON).
Tilray’s Multiple Matters
However, despite the modest recovery, TLRY shows us one thing—even with hot stocks just as TLRY, fundamentals still matter. That does not mean that Tilray’s PS ratio is going to the current S&P 500 average of about 2.2.
Nor does it mean it will come close to the S&P’s current price-to-earnings (PE) ratio of just above 22 when it becomes profitable. Assuming Tilray survives in its current form, I think TLRY is years away from either scenario.
However, to continue to justify its higher multiple, it has to move on prospects not yet priced into TLRY stock. The decline in recent months hinges on the fact that it no longer sees those new markets and lines of business.
The only near-term prospect I see involves the one mentioned by my colleague, James Brumley. He noted that Tilray has begun to export cannabidiol (CBD) to the U.K. Britain has legalized the sale, but not the production of CBD products.
Still, while that could give TLRY a near-term boost, I would not count on that prohibition on production remaining in place long term. Partnerships with Novartis (NYSE:NVS) and Anheuser-Busch InBev (NYSE:BUD) in 2018. But that was 2018.
Worse for Tilray stock, investors have more choices. More countries continue to legalize. The market price of marijuana continues to fall steadily in its home market.
Given these factors, I see nothing on the horizon that can send TLRY higher. As gravity begins to take a stronger hold on the equity, it becomes increasingly likely it will mostly move in a downward direction.
The Bottom Line on Tilray Stock
The recent reprieve in the long decline in Tilray stock will likely not last. Over the last month, Tilray stock moved higher by almost 20% as its largest shareholder chose to keep more shares from hitting the open market.
Unfortunately, fundamentals have begun to catch up to TLRY. With cannabis prices falling, competition increasing, and prospects for added growth diminishing, the 80-plus sales multiple has become more difficult to justify.
Revenue growth remains robust, and Tilray should remain one of the larger companies in Canadian cannabis. However, with TLRY at its current valuation, investors should either look at market leader Canopy Growth or hold out for a lower price.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
