The Reason Cannabis Investors Should Be Watching Tilray

- October 10th, 2018

BC-based Tilray is currently the most expensive pot stock and could be an important indicator of where the marijuana industry is headed in Canada and beyond.

Tilray (NYSE:TLRY) is an American company with a license to produce cannabis in Canada.

Since completing an IPO in July, the stock has been on a wild roller coaster, going from $17 to $300 in just two months, and then back down again to $100 shortly thereafter. Even still, at the $100 mark Tilray is by far the most expensive in the space. That has some investors saying it’s a bubble — but is it?

Because cannabis has yet to become legal, the fundamentals surrounding all cannabis stocks are based on speculation and investor sentiment at this point. While some estimate that the cannabis market could be worth $146.4 billion by 2025, if and when that will happen remains a big question because the infrastructure is still being built out for this market.

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Nonetheless, most seem to agree that cannabis stocks will continue to surge until sometime after legalization day in Canada, which is October 17, 2018. Some believe positive momentum will continue until the first quarterly report post-legalization occurs; at that point the penny may drop if sales don’t come close to reflecting market caps.

Tilray is caught in the mix of this debate, the same as any other pot stock. However, it does have some characteristics that makes it especially worth watching. Read on to learn more.

Tilray’s advantages

While Tilray only did its IPO recently the company certainly is not new. It’s been around since 2013, making it one of the original brands in the space. As such, it has a solid foundation in infrastructure and a broad set of supply deals for medical cannabis dating back several years.

In fact, Tilray has supply deals with countries all over the world, including a recent export deal with Germany, and another for CBD oil in the UK. So as a farmer and manufacturer, Tilray has some experience and strategic relationships on its side.

Speaking of strategic relationships, Tilray’s relationship with PayPal founder Peter Thiel can’t be ignored. News that Thiel was investing in the cannabis space dates back to 2015, when Thiel’s company Founders Fund obtained a minority stake in Privateer Holdings, the same company that backs Tilray.

Since then, Thiel’s firm has helped Tilray raise an additional $200 million. Thiel has also helped give the company clout, as people associate his business savvy with the brand and are counting on his judgment. This has brought more investors into the cannabis space who might have otherwise held back.

Another upside to Tilray is that recently it made news when it became the first Canadian firm to gain approval from the US Drug Enforcement Administration to import medical cannabis for a clinical trial.

The hope is that this won’t be the last import approval in the US for the company. This approval also seems to lend greater support for Tilray’s legitimacy and confirms it as a key player in the space.

Tilray’s subsidiaries have also raised interest. These include Marley Natural, the official Bob Marley cannabis brand, as well as High Park Farms, which just received its license to sell under the ACMPR.

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Tilray’s potential setbacks

As mentioned, Tilray is the most expensive cannabis stock on the market by a long shot. It’s also been arguably the most volatile of the bunch, making it an expensive risk for investors.

Major criticism came recently when Tilray was publicly shorted by Citron Research on September 4, 2018, and soon after fell by about 9 percent. It rebounded less than a week after, but even so it’s good to take a look at the reasons cited for the short.

Andrew Left, founder of Citron, pointed out that the company is a farmer and manufacturer — while that’s important to the market, it isn’t traditionally the target of investors. Take the apparel industry, for example — people invest in Ralph Lauren (NYSE:RL), not the cotton farmer or the clothing factories abroad. Speculators tend to invest in brands instead.

In this case there is a differentiating factor in that farming and manufacturing are restricted by government licenses, thereby creating value for Tilray. Whether that value is accurately reflected in the stock is what Citron was calling into question.

Left also pointed out that Tilray has a lot of capital expenditures, and lacks agility. Additionally, he said, “six weeks ago the company and their bankers thought it was fair to sell stock at $17 … now it’s $91.”

The Tilray share price soared well past that amount just a few weeks later, but even then Left called the rise in the stock “excessive,” and claimed that people seem unclear about the space and what they’re actually buying. He went on to call it “peak hysteria” and said we will likely see more volatility in the space if sentiment continues to rule.

Another point of consideration regarding Tilray’s valuation compared with its peers in the space is that unlike many of them, Tilray has not made any public acquisitions.

Other cannabis companies like Canopy Growth (TSX:WEED), Aurora Cannabis (TSX:ACB), CannaRoyalty (CSE:CRZ), iAnthus Capital Holdings (CSE:IAN), MPX Bioceutical (CSE:MPX) and MedMen Enterprises (CSE:MMEN) have all bolstered their stock valuations by acquiring other companies. This is expected to offset the speculation bubble and support their share prices come legalization day.

Tilray has not done this so far, which could mean greater vulnerability post-legalization.

Investor takeaway

Whether you’ve decided to take the plunge and invest in Tilray, or wait on the sidelines to see if the price comes down, Tilray is certainly worth watching in the cannabis space. Would you invest in Tilray? Tell us in the comments below.

This is an updated version of an article originally published by the Investing News Network in 2016. 

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Amanda Kay, hold investments in Canopy Growth and Aurora Cannabis.

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