Tilray (NASDAQ:TLRY) stock has been in a downtrend since it rose to $214.06 after being the first cannabis company to go public. The stock is now trading below $25 per share ($24.88 as of this writing) and has a market capitalization of $2.36 billion. And as InvestorPlace contributor Will Ashworth wrote in an earlier article, it’s hard to know if Tilray stock will fall further.
In August, Tilray reported record revenue. But in an industry where companies are not — and may never be — profitable, investors have lost patience with revenue numbers. They are looking for more. So are analysts.
In September, Cohen analyst Vivien Azer cut her price target for TLRY from $150 to $60. And that was the good news. The bad news came from Vertical Group analyst Gordon Johnson who forecast a price target of just $4.
Before looking at where Tilray is going, investors need to understand why it has gone where it’s gone.
Emotion Drove Tilray Stock to an Unsustainable Height
There’s a saying in marketing that consumers buy on emotion and then justify with facts. In 2003, Harvard Business School professor Gerald Zaltman in an interview for the Harvard Business Review said that 95% of our purchase decision making takes place subconsciously.
This thinking is necessary in a market economy that relies on “branding” and “value beyond price.” But it’s dangerous for investors. In fact, that kind of thinking creates asset bubbles. Investors buy on emotion, which spawns more buyers. Asset prices go up and up until there is no longer a rational reason for prices to go up. This is what happened to Tilray and other cannabis stocks.
And at the end of 2018, that’s exactly what happened with TLRY. Many investors were diving into Tilray stock because of hype. They justified their investment with the only fact that was available at the time, revenue. But as the calendar turned into 2019, investors have come to realize that there has to be more than revenue. And that’s where Tilray is coming up short for now.
Tilray Isn’t Playing the Production Game
The cannabis industry is still sorting out the market dynamics of supply and demand. Ultimately, for cannabis companies to become profitable, the price per gram must reach the right level. Many of the leading cannabis stocks such as Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB) are making major investments to increase their growing and production facilities.
On the other hand, Tilray is committed to an asset light model that relies less on production and more on product development and retailing. This is where Azer may be on to something.
One of the reasons Tilray stock was punished this year is that the company was viewed as being more susceptible to supply problems. And Tilray has taken efforts to boost its production. But this was more about Tilray wanting more control of the quality of the product. In fact, according to Tilray CEO Brendan Kennedy, the company wants to grow just 5% of the industry’s product.
Instead, Kennedy remarked in the company’s second-quarter conference call that TLRY has signed long-term wholesale supply agreements that lets the company focus on other areas such as product development and retailing. In May, Kennedy conceded that in ten years, he wants Tilray to grow a modest 5% of the industry’s product. However, as James Brumley wrote, there is a looming supply boom that should provide Tilray with no shortage of affordable supply.
Cannabis Is Still an Emerging Market
In Canada, legalization of recreational cannabis is only now celebrating its one-year anniversary. The market for edibles and other CBD-infused products will open later this month, but products will not be in stores until December.
In the U.S., the picture is even more fragmented. California, Nevada, and Florida represent huge opportunities in the recreational cannabis market. However, these states are still creating an infrastructure. And the industry is still waiting for New York and New Jersey who are expecting, but not guaranteed, to legalize in 2020.
More Patience Is Required
It’s been a terrible year for cannabis investors. However, now might be the time for more patience, not less. Tilray is showing a certain amount of fiscal restraint by not immersing itself too deeply in the growing and cultivating business. That could be smart as this is where most of the consolidation is likely to take place in the next several years.
But that is also where most of the growth is likely to take place. Kennedy has repeatedly said the company and the industry is only on day one of where it will be. For the sake of Tilray stock, I hope he’s right. The real story of the cannabis sector won’t get written until there is full access to the U.S. And while I continue to believe that is now just a matter of when, not if, it’s not here yet.
I can’t see any of the major cannabis stocks dropping down to a penny stock level as Johnson suggests. I’m also not going to pound the table for TLRY stock to climb almost 200% from current levels. At least, I’m not seeing that growth in the short term. However, investors with the patience to wait on a long-term speculative play in the cannabis sector may want to keep an eye on Tilray stock.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.