Why Tilray’s Stock Is Bound To Go Down

Cannabis company Tilray Inc.’s (NASDAQ: TLRY) stock has soared since its debut on NASDAQ, increasing a scarcely believable 1,160%. The euphoria surrounding the legalization of recreational marijuana in Canada, the potential of tie-ups with alcohol giants for producing cannabis-infused drinks, inking of supply agreements with certain Canadian provinces, and receiving the necessary regulatory permits to export medical cannabis flower to Germany are a few of the factors responsible for the mammoth rise in the share price. The pot company also posted its second quarter results on August 28, wherein it beat consensus expectations on revenue, which rose 95%, but missed on earnings, with losses widening to $12.8 million versus $2.4 million in Q2 2017. With recreational marijuana use legalized in Canada, effective October 2018, along with medical cannabis usage allowed in a number of international markets, this market is expected to boom. Although Tilray is a strong contender in the race to be one of the top cannabis producers, its valuation has reached exorbitant levels, and the bubble seems poised to pop at any time.

We currently estimate a price of $43 for Tilray Inc using a 2019 P/E multiple of 20, which is much lower than the $214.06 it currently trades at (as on September 19, 2018). We have created an interactive dashboard analysis on Our Outlook For Tilray Inc. In FY 2019 to estimate Tilray Inc.’s Valuation based on its expected revenues for FY 2019. If you disagree with our forecast, you can make changes to these variables to arrive at your own price estimate for the stock.

Certain Factors To Consider

1. Legalization In The U.S. Necessary To Justify The Valuation: By listing on a U.S. stock exchange, Tilray has shut itself from conducting any business in the country, as long as marijuana isn’t legalized at the federal level. It is no doubt Canada will become a big market for recreational marijuana, estimated to be anywhere between $5 billion and $10 billion per year by CIBC World Markets. However, in California alone, the market is expected to be $5.1 billion in 2019, according to BDS Analytics. For the U.S. as a whole, the recreational cannabis market is said to range from $50 billion to $55 billion, with the size of the Canadian market dwarfing in comparison. Further, the overall marijuana market in Europe is foreseen to reach $66.8 billion in the next five years. Unless these markets open up further, the absurd multiple that Tilray trades at currently can not be justified.

2. Lock-Up Period: Privateer Holdings owns 100% of Class 1 common stock (with higher voting power) and 76% of Class 2 common stock, representing 81% of the shareholding and 93% of the voting power of Tilray. Consequently, the company has a very low level of float at the moment, which may be one of the factors causing the dizzying level of prices. Moreover, Privateer’s shares are subject to a 180 day lock-up period, which expires in mid-January 2019. Thereafter, if the holding company wishes, it can flood the market with Tilray’s shares, which could lead to a substantial drop in the prices.

2. No Institutional Investing: Institutional investors have shied away from investing in cannabis companies given the illegality at the federal level in the U.S.  Consequently, Tilray’s share price is determined by the impulses of the public. With cannabis being a stock market favorite at the moment, it has resulted in the prices of many companies in this field shooting up, though none more so than Tilray.

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