What happened
Shares of Tilray Inc. (TLRY +0.00%) were down 11.6% as of 11:09 a.m. EDT on Tuesday. The drop marked the second consecutive day of double-digit-percentage losses; Tilray's share price plunged 15.6% on Monday, along with major declines for several other Canadian marijuana stocks.
Tilray and many of its peers enjoyed huge runs leading up to the opening of Canada's recreational marijuana market on Oct. 17. Many investors apparently decided to take profits rather than wait and see how Tilray and other major marijuana growers would fare in Canada's new market.
Image source: Getty Images.
So what
In most cases, investors would be better off ignoring fluctuations in stocks like those that Tilray has experienced. Even with two back-to-back days of the stock tumbling, Tilray is still up more than 380% so far in 2018.
But Tilray's large gains have pushed the stock's valuation to levels well beyond what its growth prospects -- at least over the next several years -- would justify. CEO Brendan Kennedy has publicly stated that the global marijuana market is $150 billion and that there could be several marijuana businesses worth $100 billion or more. That might make Tilray's market cap -- close to $10 billion -- seem reasonable. But it isn't.
The $150 billion figure that Kennedy mentioned comes from a United Nations estimate of worldwide marijuana revenue that includes illegal marijuana sales. Investors should focus on estimates of the legal marijuana market. Global sales of legal marijuana are projected to be $12.9 billion this year. How reasonable does Tilray's market cap seem now?
It's true that the marijuana industry is growing rapidly. By 2022, total marijuana sales are expected to increase to $32 billion. But nearly three-quarters of legal marijuana sales will be made in the U.S. -- a market where Tilray can't operate currently.
Now what
Canadian marijuana stocks in general will probably experience significant volatility over the next few months. But the volatility for Tilray could be even more intense. Tilray's low stock float means that heavy buying and selling of its shares can have a greater impact.
Over the long run, Tilray has solid business prospects. The company should enjoy strong sales growth from the Canadian recreational marijuana market. Tilray is well positioned in international markets, particularly Germany.
However, the stock's valuation still reflects growth expectations beyond what Tilray's business prospects, strong as they might be, really are. I suspect there will be more days like today for Tilray.
