Canada's Tilray, a medical and recreational marijuana company, has burst onto the scene since completing its IPO last July. In fact, it quickly became the most valuable Canadian or U.S. cannabis company by a long shot earlier this month, although it has since reverted to the mean to some degree and now stands second to Canopy Growth Corporation in terms of market capitalization.  

The stock's nearly ninefold rise at peak has bewildered growth and value investors alike. Tilray, after all, is the fifth-largest marijuana company by production capacity at present and there are a handful of other players like CannTrust Holdings and OrganiGram Holdings hoping to leapfrog Tilray's output over the next 12 to 18 months. Tilray is arguably even less well established in the medical cannabis market and recreational brand building than CannTrust. 

A crown sitting on a red velvet background.

Image source: Getty Images.

So, why did Wall Street see fit to briefly assign Tilray the industry's richest valuation -- and one that still far surpasses the likes of competitors like CannTrust and OrganiGram -- earlier this month? Let's dig deeper to find out.

How Tilray stacks up

Tilray's main selling point to investors has been its ability to build out a trustworthy business in a landscape that has historically been chock-full of charlatans. And this strategy has worked out brilliantly based on Tilray's meteoric rise over the past three months.

That's not exactly surprising. Investors, after all, have been desperately searching for "safe" ways to gain exposure to this skyrocketing space that's forecast to reach a massive $250 billion in global sales by 2030. But with the Canadian adult-use recreational market set to open in about three weeks from now, Tilray's trust campaign may lead to buyer's remorse among some investors. 

Although Tilray has positioned itself well for long-term growth by launching subsidiaries in Portugal, Germany, and Australia/New Zealand, Canada is undoubtedly going to be the main base of legal cannabis sales for the foreseeable future. And that poses a serious near-term problem for Tilray from a valuation standpoint. 

As the table below clearly shows, Tilray is not expected to be in the upper echelon of revenue generators once the Canadian adult-use market opens up. As a result, its otherworldly valuation is arguably hard to justify as things stand now.

Company Projected 2019 Revenue  Est. 2019 Price-to-Sales Ratio
Aurora Cannabis (TSX:ACB) $351 million 25.6
Canopy Growth Corp. (NYSE:CGC) $284 million 41.7
CannTrust Holdings (TSX:TRST) $114 million 8.73
HEXO Corp. (TSX:HEXO) $83.4 million 15.2
OrganiGram Holdings (NASDAQOTH:OGRMF) $89.5 million 7.4
Tilray, Inc. (NASDAQ:TLRY) $117 million 91.1

*Estimates provided by Yahoo! Finance. Revenue is in U.S. dollars.

Longer term, Tilray's decision to supply medical-grade cannabis for ongoing clinical trials in various countries and its efforts to build a foothold in key international markets like Germany could pay off handsomely. But the company's near-term outlook is certainly out of step with the rest of the industry. 

Investing takeaway

Tilray's stock has probably performed far better than expected thanks mostly to its beneficial share structure (extremely low number of shares available for trading), not its near-term growth outlook. Once the company's lockup period expires 180 days after its IPO, however, this situation should change dramatically. Put simply, Tilray isn't likely reclaim its top spot among Canadian pot stocks anytime soon, if ever. 

Bottom line: There are far more compelling bargains in the high-flying cannabis industry right now than Tilray. CannTrust and OrganiGram, for example, are quantitatively better value buys at present, and the 800-lb. gorilla that is Canopy Growth Corp. will probably end up the leader in the space once the dust finally settles over the next year. That's not to say that Tilray won't be a great long-term investment, but investors may want to wait until this stock pulls back by 50% or more before buying shares.