Momentum is building for marijuana stocks ahead of the opening of Canada's recreational cannabis market in October, and Tilray Inc. (TLRY) is among the industry's biggest recent winners. Tilray's shares have almost doubled this month because of growing optimism that it will be the next marijuana stock to strike a deal with a major consumer products company. Can this stock continue to climb?

Tilray's business

Tilray has four facilities with a combined 912,000 square feet of space that can be used to grow cannabis, extract chemical cannabinoids found in marijuana, and package cannabinoids for sale as medicine and as consumer products.

A marijuana leaf sitting atop a $100 bill.

Image source: Getty Images.

Unlike some marijuana growers, Tilray is less interested in profiting from pot itself and far more interested in making its name selling nutraceuticals (foods with medical benefits) to help patients with unmet medical needs. 

It's trying to prove the value of marijuana as medicine (and drive demand for its marijuana products, including edibles). Tilray is studying cannabinoids' effectiveness in patients with severe epilepsy in Canada, and it's evaluating cannabinoids as a treatment for chemotherapy-induced nausea and vomiting in Australia.

It also supplies cannabis to pharmaceutical distributors in 12 countries, and it's working with Novartis' (NVS 1.38%) generic drug arm, Sandoz Canada, to create medicinal marijuana products that can be sold in pharmacies and used in hospitals.

Why Tilray's shares are skyrocketing

Tilray began trading on the Nasdaq exchange in July, but its share price really began to take off in mid-August when CEO Brendan Kennedy said that top institutional investors were among those participating in its IPO, and the company announced a deal to supply marijuana products, including Marley Naturals (the official brand of legendary musician Bob Marley), to recreational marijuana customers in Ontario. 

The Ontario distribution deal expands the reach of its consumer products beyond Quebec and Manitoba, where Tilray previously announced distribution agreements, and the institutional ownership helps validate marijuana's market potential.

Investor optimism has accelerated even more in September after the company reported that sales surged 95% year over year to $9.7 million in the second quarter and rumors began that beverage companies were approaching marijuana producers following Constellation Brands' (STZ -0.44%) investment in Canopy Growth.

Tilray's annualized sales of $38.8 million exiting the second quarter is a big improvement over its sales of $20.5 million in 2017 and $12.6 million in 2016. And the potential to cozy up to a deep-pocketed partner could add billions of dollars in sales, plus crucial marketing and distribution experience. A deal with a partner hasn't been announced, but Bloomberg's report on Sept. 17 that Coca-Cola (KO 0.61%) is discussing a deal with Tilray competitor Aurora Cannabis (ACB -1.21%) further fueled investor hopes that companies are also knocking on Tilray's door.

Furthermore, Tilray shares got a boost yesterday when the U.S. Drug Enforcement Agency (DEA) cleared it to export capsules containing the cannabinoids THC and cannabidiol to the University of California San Diego Center for Medicinal Cannabis Research (CMCR) for use in a study of patients with essential tremor, a movement disorder common in people over age 65.

TLRY Chart

TLRY data by YCharts.

Is it a buy?

Tilray is in a very good position to capture sales when Canada's recreational market opens. That's great news, because Deloitte estimates Canada's adult recreational market could exceed 1.8 billion in Canadian dollars ($1.38 billion) in 2019.

It's also in a good position to benefit from the global rise in medical marijuana. Its existing pharmaceutical distribution network could help it in important markets, such as Germany, where medical marijuana was approved last year. Tilray's partnership with Noweda, one of Germany's biggest pharmaceutical distributors, might allow it to win a meaningful share of Germany's medical marijuana market. And since Germany's market is much bigger than Canada's, Germany could contribute meaningfully to Tilray's revenue in the future.

Overall, the global marijuana business, including the black market, is worth $150 billion, according to the United Nations. That alone makes Tilray an intriguing stock. But there are reasons to approach the company's shares cautiously.

Because of its skyrocketing share price, its $10.2 billion market cap is 263 times greater than its annualized second-quarter revenue. Also, 93% of Tilray's voting power is held by Privateer Holdings, the venture fund that created Tilray, and a lockup period that prohibits insiders from selling Tilray shares expires in January 2019. If insiders sell a lot of shares once the lockup expires, then it could pressure shares lower. It's also possible that Privateer Holdings' goals won't always align with those of individual investors. 

Nevertheless, I think that if shares drop due to the lockup expiration or because of worries over valuation, then aggressive investors should consider buying some shares. The worldwide marijuana market opportunity is massive, which could eventually resolve any concerns over its valuation.