When bubbles pop, the aftermath can be devastating.
However, at some point, prices tend to overshoot to the downside.
And that appears to be the case with Tilray Inc. (TLRY), the cannabis company and Reddit darling.
But is this just a relief rally or something more?
We decided to find out.
Everyone remembers when shares soared from $8 to nearly $70 to start the year…
Right before plummeting back below $13.
Since then, the stock crept higher, gaining nearly 50% in four weeks.
Interestingly, our TrackstarIQ data revealed searches climbing higher alongside the stock.
So that got us thinking that maybe there was something more than meets the eye.
Tilray in a nutshell
Based out of British Columbia, Canada, Tilray conducts medical cannabis research, cultivation, processing, and distribution all over the globe as well as hemp.
Cannabis makes up around 65% of its total sales and ~69% of its profits.
To give you an idea, recreational cannabis use accounts for around 40% of their sales. 56.6% of their revenue comes from Canada, 23% from the U.S., and the rest from international markets.
Tilray merged with Aphria last month, creating one of the largest cannabis companies in the world (and now also owns Atlanta-based Sweetwater Brewing Company).
Are prices justified?
Most people say no.
The current market capitalization puts TLRY at around $9 billion.
That’s pretty aggressive considering the company has yet to turn a profit since they really started growing.
However, one major item, the change in fair value of their warrant liability, hit them for $263M in their most recent quarter (which is a non-cash expense).
These warrants are just options for the right to buy a certain amount of shares at a given price that remain outstanding.
Ohh, and they had a litigation settlement for $45M.
Take both of those out and you’re still at a $33M loss for the quarter.
Currently, their price to sales ratio (P/S) is extremely high at 10x (assuming the new revenues), but so is most of the industry.
To give you an idea, Tesla (TSLA) has a P/S ratio of 18.75x while Apple is at 6.7x.
Our hot take
It’s tough to look at this as anything other than a speculative investment for two key reasons.
First, cannabis isn’t legal in the U.S. at a federal level. Until that changes, you still have a major growth cap.
Second, many companies in this industry, including Tilray, have yet to turn a profit.
That’s not to say this couldn’t be a great company at some point or even a bad investment now.
But, don’t assume that the craze will last forever. Nor should you put this in the same category as a company like Apple.
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