Once high-flying marijuana stocks have come crashing down over the past several months, and the face of the cannabis bubble popping is none other than medical cannabis company Tilray (NASDAQ:TLRY). At the peak of the cannabis bubble back in September 2018, TLRY was a $300 stock. Today, Tilray stock trades hands just above $22.
That’s a 93% decline in just over a year. Naturally, after a 90%-plus plunge in value, the question now becomes: how much lower can TLRY stock go?
Unfortunately, I think the reality is that this stock can go quite a bit lower over the next few months and quarters. Indeed, my numbers suggest that Tilray stock could fall another 20% until it finds some semblance of valuation support.
As a result, investors should continue to shun Tilray stock. It’s been a loser for the past 12-plus months and will remain a loser for the foreseeable future.
Tilray’s Fundamentals Remain Hampered by Uncertainty
The cannabis industry will be huge. Decades of data show that cannabis consumption is climbing, while alcohol consumption is declining. Now almost as many consumers smoke cannabis as drink alcohol.
So once marijuana is fully legal, the global cannabis market will likely be equivalent in size to the global alcoholic beverage market, meaning that cannabis will be a multi-hundred-billion-dollar industry.
But in this soon-to-be huge industry, there will only be a few winners. That’s how all emerging growth markets work. There’s the initial gold rush. Everyone and their best friends jump into the market. The market grows, matures, and consolidates around a few larger players. Those few players become huge winners in the long-run, and everyone else fades into oblivion.
Just think about the birth of the internet economy. In the late 1990s, there were hundreds of companies who said they’d change the world. Only a few — Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG), Netflix (NASDAQ:NFLX) — accomplished that goal. Most of the rest disappeared.
The cannabis market will follow a similar path. There are hundreds of cannabis companies out there. A few will reap the rewards of dominating the multi-hundred-billion dollar cannabis industry. The rest will fall by the wayside.
At this point, there isn’t much reason to believe that TLRY will be one of the long-term winners. It isn’t bigger than its peers, it doesn’t have more resources than its competitors, and it doesn’t dominate a unique niche. As long as its long-term outlook continues to remain uncertain, Tilray stock will remain weak.
The Valuation of Tilray Stock Is Unreasonably High
Tilray stock is more richly valued than its peers, and there’s not a good reason for the disparity.
Tilray’s enterprise value is roughly $2.3 billion. Analysts’ average FY21 revenue estimate for the company is around $525 million, according to YCharts. So TLRY stock trades at a an enterprise-value-to-2021-sales multiple of 4.4. That’s the highest 2021 EV-sales multiple among notable marijuana stocks. The average 2021 EV-sales multiple of Canopy Growth (NYSE:CGC), Cronos (NADSAQ:CRON), and Aurora (NYSE:ACB) is about 3.4. Thus, TLRY stock would have to fall more than 20% in order to be valued in-line with its peers.
There’s no good reason for TLRY stock to have this valuation premium. The company isn’t projected to grow more quickly than its peers. Actually, according to YCharts, Tilray’s revenue is poised to grow at the slowest rate among the Big 4 cannabis companies over the next two years. The company’s valuation also can’t be explained by profitability, as Tilray’s margins are below-average for the sector. And unlike Cronos and Canopy TLRY doesn’t have a multi-billion dollar investment from and partnership with a big-time consumer staples company.
The valuation premium of Tilray stock is likely due to the idea that Tilray is the leader of the medical cannabis market. But that seems like a weak and largely unsubstantiated rationale for a 20% valuation premium.
As a result, I think the valuation of Tilray stock is unreasonably high.
The Bottom Line on TLRY Stock
Tilray stock has been stuck in a vicious downtrend over the past 12-plus months. The shares will likely remain stuck in this downtrend for the foreseeable future, mostly because its fundamentals remain weak, its long-term growth outlook is uncertain, and its current valuation appears to be too high
I’d recommend staying away from Tilray stock.
As of this writing, Luke Lango was long AMZN, NFLX, and CGC.
