Investors have become very interested in companies that grow marijuana and produce cannabis products as the laws and public opinion both in the U.S. and abroad are changing to become more accepting of medical - and in some cases recreational - use of the plants. Marijuana is legal for medical use in 30 U.S. states and for recreational use in 9 states and the District of Columbia. Because marijuana in all of its forms remains illegal at the federal level in the United States however, most large tobacco, beverege and pharmacuetical companies have taken a wait-and-see approach toward the cultivation and distribution of marijuana products, setting the stage for smaller upstarts to attempt to gain a foothold in the rapidly growing industry.
Canadian company Tilray (TLRY - Free Report) , a global leader in medical cannabis research, cultivation, processing and distribution, offered shares to the public for the first time on July 19th. Shares were priced at $17, slightly above the expected range of $14-16/share and closed trading on the first day at $22.39/share – an increase of 30%. By all measures it was an extremely successful offering, showing the high level of investor demand for pure-play marijuana companies.
That strong first day was only the start of a huge rally however, as Tilray shares have steadily increased almost 900% over the IPO price in the past two months, closing at $155/share on Tuesday – a single day gain of 29%.
Many modern cannabis companies are surprisingly sophisticated - and Tilray is no exception. To employ a somewhat tired cliché, this is not a company that supplies the Dorito’s and Mountain Dew “stoner” crowd. In fact, the organizational and management structure at Tilray looks a lot like a modern pharmaceutical company, with a focus on delivering high-quality products in extremely precise doses to research labs and patients.
A significant portion of Tilray’s research is in cannabidiol (CBD), a non-psychoactive compound found in some marijuana strains that has shown promise as an anti-inflammatory, as a pain reliever that’s much safer than opioids and in significant symptom relief for those who suffer from epilepsy and other neurological disorders. Though it’s early in the game, CBD also has been found to slow the progression of Alzheimer’s and many types of cancer.
What about that Share Price?
Initial public offerings are often priced at a slight discount to the underwriter’s estimates for public demand to ensure full subscription to the offering and reward investors who are willing to put capital at risk in companies who don’t yet have a long history of financial performance. Consequently, the shares of many offerings rise in price in the period immediately following the IPO as public investors bid up the shares on the open market.
Arguably, a healthy market would see shares rise gradually as the investing public becomes increasingly comfortable with the financial data of new companies, and pays higher prices for a higher level of certainty that the firm is on the path to increased profitability.
Shares that rise 900% in two months is far from typical, so let’s see how we got there.
The Tilray Timeline
For three weeks after the offering, Tilray traded in a fairly tight range between $22-$24/share as some IPO customers took quick profits and new investors got on board, purchasing shares in the open market.
In August, shares began to climb as it became clear that Tilray was serious about expanding its global footprint, inking deals to export cannabis products to Europe, South America, Africa and Australia. On August 27th, it was announced that Tilray had been chosen as the exclusive supplier of cannabis to the Nova Scotia Liquor Corporation when Canada officially legalizes marijuana on October 17th. Shares rallied $14 in a single day to close at $57.24.
The next day, Tilray reported quarterly results for the first time as a public company and delighted investors with revenues of $9.7M, an increase of 95% over the same quarter in 2017. Though they also reported a net loss of $12.8M in the quarter, the growing revenues along with higher average selling prices propelled the shares even higher, to $89/share by September 5th.
After taking a breather, Tilray shares gained momentum again during the second week of September on news that they were exporting large amounts of cannabis flower and CBD oil to both Germany and the U.K., achieving a closing price of $120/share on September 13th.
Finally, this week saw the news that the Drug Enforcement Agency has approved Tilray to export pharmaceutical-grade medical cannabis product to the U.S. for use in a clinical trial at the University of California San Diego. The resulting investor enthusiasm about the potential for extensive medical use of Tilray’s products – especially in the U.S. where research has been sparse so far - carried the shares to a new all time high of $155 and a market capitalization of $14.4 billion.
Is it a Bubble?
Clearly, investors who are buying Tilray at these levels are paying for the future potential of owning one of the largest – if not the largest – global supplier of cannabis for the medical markets. In the mold of many technology companies, Tilray doesn’t yet turn a profit and probably won’t for the foreseeable future as it pursues aggressive expansion plans, so it can’t easily be compared to other stocks in terms of P/E Ratio.
With a little extrapolation, however, we can compute a rough price to sales ratio, which is useful in valuing companies with inconsistent or non-existent earnings. With $9.7M in sales in Q2, a whole year of sales would be approximately $38.8M, and with 76 million shares outstanding, that equals about $2/share in sales. With a share price of $155/share, we have a price to sales ratio of over 75X – an astronomical number for a ratio that’s generally measured on the low single digits for mature companies.
The marijuana space has entranced investors with the idea that they can own companies in the early stages of a rise to global domination, and a few of them probably will, but many more will flame out. Tilray has made truly impressive strides toward positioning itself as a leader in the field, but there is still a long way to go and in all likelihood, there will be a slew of new competitors you haven’t even heard of yet.
It might make a great longshot trade in the absolutely most speculative portion of a portfolio, but at these prices, Tilray can’t be recommended as a serious long-term investment. There’s simply too much we don’t know yet.
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