Here’s Why Tilray Stock Is a High-Risk, High-Reward Situation

Tilray stock is on a long-term rollercoaster ride

All pot stocks have been on a roller coaster ride over the past year. But, none have been quite as volatile as Tilray (NASDAQ:TLRY) stock. Over the past twelve months, Tilray stock has gone from $20, to $300, to $100, to $150, to $35.

Here's Why Tilray Stock Is A High-Risk, High-Reward Situation
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That’s a wild ride. Investors should expect it to continue. At their core, almost all pot stocks are high-risk, high-reward investments, given the speculative nature of the cannabis market and its long term growth prospects.

TLRY, though, has more risk and more potential reward than peer pot stocks. As such, while all pot stocks project to undergo volatile swings for the foreseeable future, the swings in TLRY stock should continue to be more pronounced.

What’s the investment implication? Stay away from Tilray stock. For now. If you’re looking to invest in the cannabis market for the long haul, there are safer and more reasonable ways to do so — see market leader Canopy Growth (NYSE:CGC).

But, there is a scenario in the foreseeable future where TLRY stock does become a buy. Consequently, while I’m staying away from Tilray for now, I’m also keeping a close eye on it, and am ready to pull the trigger if the stars align for this stock.

The Current Dynamics Imply High Risk, High Reward

The present situation surrounding TLRY is defined by a few critical characteristics, all of which imply that TLRY stock’s inherent high risk, high reward trading nature will persist for the foreseeable future. Those characteristics are as follows.

  • One entity holds most of the outstanding stock. Perhaps the most important element of Tilray stock is that one investor (Privateer Holdings) holds nearly 80% of the outstanding stock. To be sure, this one investor has agreed not to unload all of the shares at once, and instead will gradually unload them over the next two years. Still, in the meantime, the trading float here is relatively constrained, and a big portion of that float is short. A small float plus a big short interest implies sustained big volatility over the next few quarters.
  • No consumer staples giant has invested in Tilray, yet. Another important element of Tilray stock is that, while peers Canopy and Cronos (NASDAQ:CRON) have scored multi-billion dollar investments from global consumer staples giants, Tilray has not. There are two ways to interpret this. Either no one wants to invest in Tilray, or someone will invest in Tilray. There are reasonable investors in both camps. So long as both those competing theories have supporters, TLRY stock will remain volatile.
  • Tilray is much smaller than the cannabis market leaders. Both Canopy and Aurora (NYSE:ACB) sold over 9,000 kilograms of cannabis last quarter and reported revenues of roughly $50 million or greater. Tilray sold just 3,000 kilograms of cannabis last quarter, with revenues of $23 million. This relative “smallness” means that Tilray could one day gain on its bigger peers, or be eaten alive by its bigger peers. So long as both of those outcomes are possible, TLRY stock will remain volatile.

Broadly, so long as the float remains constrained, no consumer staples company has invested in the company, and Tilray remains substantially smaller than the cannabis market leaders, TLRY stock will remain volatile.

Tilray Stock Could Become a Buy

Given the enormous volatility inherent to the stock, I think TLRY is best avoided at the current moment. Having said that, there is one thing which could dramatically reduce the volatility and make TLRY stock a buy. That one thing would be a multi-billion dollar investment from a consumer staples giant.

Here’s the bull scenario. Privateer Holdings is just now starting to offload some of its shares to strategic and institutional investors. In so doing, they are paving the path for a consumer staples giant to inject capital into the business. Consequently, a consumer staples giant that was formerly unable to invest in Tilray because of Privateer’s near 80% holding, may now pull the trigger on a big investment.

If such a big investment does materialize, Tilray stock will pop, because such an investment will mitigate present stock volatility, shore up the balance sheet, equip the company with the necessary firepower to compete at scale, and add clarity to the long term growth potential of the business.

How big will such a pop be? Pretty big. Cronos is much smaller than Tilray in terms of sales and volume. Yet, because Cronos has a multi-billion dollar consumer staples investment and Tilray does not, Cronos has a $5 billion market cap, while Tilray has a $4.4 billion market cap. Thus, if Tilray scores a similar investment, you could reasonably see TLRY’s market cap rise to well over $5 billion.

Bottom Line on TLRY Stock

Tilray stock has been, still is, and will remain the most volatile pot stock in the market. Because of all this volatility, TLRY stock isn’t a buy at the current moment. However, that volatility could subside in the not-so-unlikely event that Tilray scores a big consumer staples investment in the foreseeable future.

If that happens, TLRY stock will become a buy, given its undervaluation relative to other pot stocks with similar consumer staples investments.

Until then, though, it’s best to wait on the sidelines.

As of this writing, Luke Lango was long CGC and ACB.

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