In this summer’s pot stock sell off, Tilray (NASDAQ:TLRY) ]took a big dive. Tilray stock has fallen ~50% since July. Shares have fallen further as we enter into autumn.
After rebounding above the $30 price level in early September, TLRY shares have fallen back to around $24/share. With investor love for pot stocks dissipating, is there a solid bull case for Tilray stock? Recent developments on Capitol Hill could pave way for legalized marijuana across all 50 U.S. states.
But high expectations are still baked into the price of Tilray stock. The company has many catalysts in play, but nothing that sets it apart from other major cannabis names. Let’s take a closer look at TLRY, and see why today’s price is not a compelling entry point.
Recent Developments and Tilray Stock
Tilray saw revenue for the quarter ending June 30, 2019 of $45.9m, slightly above expected revenue of ~$40m. Gross margins continue to be down compared to last year, as the net selling price per gram continues to slide.
The scale-up of their cultivation facilities also impacts margins. Adjusted EBITDA losses grew to $17.9m, from a $4.7m loss in the prior year’s quarter.
This is par for the course with marijuana stocks. The market is still emerging, as the major pot names scale up fast in order to stay relevant. One disadvantage with Tilray is its “also-ran” status. There is nothing to differentiate Tilray from its peers such as Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC).
InvestorPlace’s Will Ashworth touched on this in his Sept. 30 article. As he put it, the company looks like a “jack of all trades, master of none.”
I agree with this analysis. Tilray has thrown its hat into many legalized marijuana rings. Like Canopy and Hexo (NYSE:HEXO), Tilray has a partnership with a major alcoholic beverage company. But Tilray’s partnership with Anheuser-Busch InBev (NYSE:BUD) is still in the research phase.
Tilray also has pharmaceutical and consumer product partnerships. But none of these partnerships are unique to the pot space.
The U.S. House of Representatives passed the SAFE Banking Act. This bill would remove restrictions that have impeded legal marijuana companies accessing traditional banking services, but the bill still needs Senate approval to become law. While moving in the right direction, a fully open American legal pot market is still years away.
How does this mixed-bag of catalysts come into play in terms of valuation? Let’s see if TLRY stock is overvalued or undervalued relative to its competitors.
Tilray Stock Trades in the Middle of the Pack
Analyst consensus estimates Tilray’s 2019 revenue to be $182.77 million, with sales growing to $340.6 million in 2020. At Tilray’s current enterprise value (EV) of $2.57 Billion, the stock sells at an EV/Sales ratio of 14 for this fiscal year, and 7.5 for the next. In my recent analysis of Hexo, I compared forward EV/Sales ratios for several of the major pot names.
Aurora and Canopy trade at forward EV/Sales ratios north of 10. But names such as Hexo and Aphria (NYSE:APHA) trade at forward EV/Sales ratios below 5. This means Tilray stock is right in the middle in terms of valuation. But with lower-valued pot stocks like Hexo showing more solid differentiators, why pay more for Tilray?
Another risk is Tilray’s concentrated shareholder ownership. Privateer Holdings holds 77% of outstanding TLRY stock. The company inked a deal with Privateer to avoid them from flooding the market with Tilray stock.
As part of the deal, Privateer will exchange its current stake in Tilray for newly-issued shares. These shares will then be distributed to Privateer’s shareholders. However, these new shares are subject to a lock-up provision. This prevents holders (in most circumstances) from selling their TLRY stock for two years following the transaction.
But what’s to say, post-lockup, that Privateer shareholders will not dump their Tilray stock? While this is an issue to contend with two years out, it remains a risk to consider.
Bottom Line: Consider Other Pot Plays
Tilray stock faces the same issues as its “cannabisphere” peers. But the company lacks a key differentiator. While the stock trades at a slight discount (on a forward EV/Sales basis) to Aurora and Canopy, also-rans such such as Hexo and Aphria can be bought at lower valuations.
The company has several catalysts in play, but nothing unique compared to what other cannabis companies are doing. I remain on the fence with pot stocks in general. But if I were entering a position today, I would choose something like Hexo or Aphria to place my bet on the legalized marijuana story. I suggest you do the same. Look elsewhere for a pot play, but steer clear of TLRY stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.