Tilray (NASDAQ:TLRY), like so many marijuana stocks, is having a terrible year. Yes, some traders like to make fun of anyone that bought Tilray stock near its $300/share peak. But don’t forget that as recently as this January, Tilray stock still traded for as much as $100 per share. This year alone, shares have lost more than half their remaining value.
That shouldn’t come as a surprise. As I explained in May, the company was doing better on earnings but the supply growth from other producers overwhelmed Tilray’s progress. That’s been a valid concern so far. TLRY stock has continued to sink as the oversupply in the Canadian marijuana market has further intensified.
The worst may finally be over, however. Tilray stock has rebounded more than 20% from its 52-week low since the start of September.
Is Tilray ready to rally again?
Tilray’s Growth Strategy Seems Reasonable
Despite the punishing decline in Tilray’s stock price, management hasn’t panicked. As I explained in that previous article, Tilray CEO Brendan Kennedy has focused on disciplined supply growth at a reasonable price. Tilray’s deals, such as buying Manitoba Harvest came at affordable prices rather than paying big bucks as firms like Canopy Growth (NYSE:CGC) have done with some of their acquisitions.
Tilray has also wisely used convertible bonds to raise funds. The convert feature is now way out of the money, ensuring that shareholders won’t be diluted unless Tilray shares go on a monster run. This was a savvy way to raise nearly half a billion in funds without hitting TLRY stock owners with much dilution.
Finally, while the international market hasn’t taken off that quickly, Tilray has a shot there as well. The company is building out its facilities in Portugal — again at a reasonable build-out cost.
Still Hasn’t Reached Critical Mass
Tilray stock bears, on the other hand, continue to question Tilray’s prospects. While the company certainly has avoided some of the excesses of its rivals, at the end of the day you need revenues and profits to justify your share price.
And Tilray simply doesn’t have much of either. Tilray’s market cap, even with the stock at just $30, is still almost $3 billion. That’s a huge valuation for a company that has produced less than $100 million in revenues over the last year. If revenues reach $200 million over the next year or two and Tilray manages to maintain a still robust 10x price/sales ratio, that’d imply an additional 33% downside on TLRY stock to around $20/share.
Also, despite the small revenue base, Tilray has a ton of product lines. With the addition of Manitoba Harvest, it now has foods and supplements in addition to the more standard fare. And Tilray has international operations in a variety of countries. Yet, it hasn’t added up to a critical mass that can deliver sustainable profits just yet. Like with Aurora (NYSE:ACB), Tilray has a lot of irons in the fire, but there’s no sign that any particular thing is heating up just yet.
CannTrust Reminds Us Of Dangers In The Cannabis Industry
While Tilray stock has enjoyed a welcome rebound, the industry isn’t out of the woods yet. The huge supply and demand imbalance continues to weigh painfully on the sector. And that’s not all. Regulatory risk remains a major concern.
Tuesday brought us a fresh reminder on that front. CannTrust (NYSE:CTST) stock plunged another 14% on the day. CannTrust hit new all-time lows after admitting that Health Canada had suspended the company’s license to produce and sell marijuana. It’s a suspension, rather than a full revocation of their operating license. Still, it was a huge blow to the company’s already damaged credibility.
The license suspension on its own shouldn’t come as a huge surprise. As InvestorPlace’s Josh Enomoto recently wrote, CannTrust suffered two major scandals. The first involved illegal growing operations hidden with false walls. CannTrust fired its CEO with cause, along with other top employees, as a result. The company also somehow had black market seeds get mixed into its inventory.
Adding it all up, CannTrust stock is now down a shocking 90% from where it traded earlier in 2019. That’s a nearly total wipeout for a New York Stock Exchange-listed company. While there’s nothing that dramatic going on with Tilray from a scandal point of view, CannTrust’s collapse serves as a fitting reminder that this is a new industry that will have tons of growing pains.
Also, it’s worth noting that marijuana companies have started getting more traction in mainstream stock indexes and associated ETFs. However, the index operators will now kick CannTrust stock out of the primary Canadian stock index and related ETFs, and other fund operators may be slower to include pot stocks like Tilray in their funds as a result of this incident.
Tilray Stock Verdict
Tilray has much better management than CannTrust, thank goodness. But that doesn’t mean that is time to get too excited about the recent rebound in the TLRY stock price.
The cannabis industry is continuing to face massive growing pains. There will be winners eventually. But more companies will end up like CannTrust as well. The industry is young and a lot of competition has to fall by the wayside for the survivors to prosper.
Tilray, without a major partner, hasn’t yet proven that it will be able to be one of the industry’s eventual winners. For now, Cronos (NASDAQ:CRON) and Canopy, with their major backers, might be a safer choice until the industry’s slump ends.
At the time of this writing, Ian Bezek had no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.