Tilray's Fall From Grace Was Long Overdue

It could be a long winter for Tilray shareholders.

Sean Williams
Sean Williams
Dec 20, 2018 at 8:21AM
Health Care

This has been a wildly successful year for the cannabis movement, and yet a terrible year for investors.

As we near the end of 2018, we can look back on countless cannabis milestones, including the legalization of recreational marijuana in Canada, multiple state-level approvals in the United States, and the U.S. Food and Drug Administration approving the very first cannabis-derived drug. There have also been numerous pot stocks that have uplisted from the over-the-counter exchange to a major exchange. In other words, it was a year of legitimacy for the pot industry.

Yet, if we take a closer look at the Horizons Marijuana Life Sciences ETF, the very first cannabis ETF, investors have done poorly. This marijuana ETF, which is comprised of more than four dozen direct and ancillary market players, has lost nearly 39% of its value in 2018, through Dec. 17.

However, there is one stock that's completely bucked this trend for much of the year: Tilray (NASDAQ:TLRY).

Cannabis buds lying atop a messy pile of cash bills.

Image source: Getty Images.

Tilray has been a top-performing marijuana stock in 2018

Tilray made history in July by becoming the first Canadian-based pot stock to go the initial public offering route on a major U.S. exchange. Having raised $153 million in gross proceeds from its IPO at $17 per share, it was believed that Tilray would have ample capital to avoid dilutive bought-deal offerings, which have been the downfall of its peers (ahem, Aurora Cannabis).

Tilray brought a lot to the table that investors liked, including its focus on high-margin medical cannabis customers, its push into international markets, its well-known medical weed brands throughout Canada, and its aggressive capacity expansion plans. When the company filed its S-1 prospectus with the Securities and Exchange Commission in June, it noted the expectation that just over 850,000 square feet of growing capacity should be complete by the end of this calendar year. With approximately 3 million square feet of adjacent land that could be built out, the expectation was that Tilray could become a top-five grower by annual yield.

Tilray also went public at a fortuitous time. Less than a month after becoming a public company, Molson Coors Brewing Co. announced a joint venture with HEXO to develop cannabis-infused beverages, and Constellation Brands announced a $4 billion equity investment into Canopy Growth. This led to speculation that Tilray would be the next to land a major partner, beyond just its partnership with Novartis' generic drug subsidiary, Sandoz.

In less than two months, Tilray's share price rocketed from its $17 list price to an intraday high of $300, valuing the company ever-so-briefly at $28 billion. Although Tilray's share price did retreat considerably, it had been hovering around $100 per share (a roughly $10 billion market cap) for months, making it a top performer in 2018.

A businessman in a suit giving the thumbs-down sign.

Image source: Getty Images.

This move lower was long overdue

However, the month of December hasn't been as kind. Shares of Tilray are down more than 35% since the month began, despite little tangible news from the company. Some pundits would suggest that this makes Tilray a contrarian buy. As for me, I call this move lower long overdue for a company with far too many headwinds and a lot to prove.


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Although Tilray hasn't released official production estimates, the company is probably only capable of 75,000 kilograms to 80,000 kilograms of annual yield with approximately 850,000 square feet of grow space. That's assuming it has all of its cultivation licenses and sales permits lined up. Should the company choose to double or triple its capacity, we're probably talking about another year or two until it reaches the point where construction is complete and its licenses and permits are in place.

Thus, even if Tilray becomes the fourth- or fifth-largest producer by annual output, it could be years before it takes its place next to Aurora Cannabis, Canopy Growth, and Aphria, which are expected to yield around 700,000 kilograms, 500,000 kilograms, and 255,000 kilograms, respectively, on an annual basis. Of course, from a market cap perspective, Tilray has been listed side by side with Canopy and well above Aurora Cannabis and Aphria, which doesn't make a lot of sense.

Tilray is also a pot stock that probably isn't going to be generating a recurring profit for years. The company will likely devote a lot of its spending to capacity expansion, brand building, marketing, medical research and development, expansion into international markets, and acquisitions. Even with rapid sales growth, expenditures should tower over gross profit. That's not a good thing, given that operating results actually matter now that pot is legal in Canada.

A Canadian flag with a cannabis leaf and a large sold out stamp across the flag.

Image source: Getty Images.

To build even further on this point, Canada is also contending with significant early stage weed shortages. More than half of Canada's provinces are experiencing shortages, which could stymie sale forecasts for pot stocks like Tilray, and hurt them over the longer run by pushing consumers back to the black market.

Another consideration investors should make is that partnerships aren't a given, even if the cannabis space offers rapid growth potential. Beverage giant Coca-Cola was purportedly in talks with Aurora Cannabis about a partnership or potential equity investment back in September. Ultimately, Coca-Cola walked away without a deal and has chosen to watch the industry from the sidelines. A similar tale can be told of Diageo, which hasn't landed itself a cannabis partner despite rumors of wanting one this past summer. 

Tilray itself does have a partner in Sandoz, Novartis' generic drug subsidiary, to distribute non-combustible. non-smokable products worldwide. What's unclear is just how much of a boon such a deal will be for Tilray and it's bottom line. Quite a bit of the company's summer rally was based on the expectation of a major partnership with a brand-name company, and I'm not sold on the idea that a distribution deal with Sandoz fits that definition (at least not yet). 

And finally, don't forget about Tilray's lock-up expiration next month. The 180-day lock-up period following its IPO hasn't allowed insiders to sell any of their stakes in the company. With shares still higher by nearly 300% since its list price, it's a good bet that at least some insiders will take the opportunity to cash in. That could be a net negative for Tilray's stock.

Don't get me wrong, there are aspect of the business model to appreciate. But when taken as a whole, this move lower is well deserved and a long time coming.