Check out the latest Tilray earnings call transcript.
This could easily have been a dismal week for Tilray's (TLRY) share price. It could have easily been the worst week ever for the stock. But it wasn't.
Jan. 15, 2019 -- last Tuesday -- was a pivotal day for Tilray. That's when the company's initial public offering (IPO) lockup period expired.
IPO lockup periods prevent insiders from selling their shares for a specified amount of time. When that period expires, they can sell all the stock they want. What often happens is that insiders sell an awful lot of their shares and the stock price falls due to resulting downward pressure from all the high-volume selling at one time.
But Tilray dodged a bullet. Shares fell on Tuesday, but it wasn't nearly as bad as it could have been. With the modest pullback (for Tilray, anyway), is this hot marijuana stock now a smart choice for investors to buy?
A helpful delay
There's one big reason why Tilray didn't experience the IPO lockup period expiration blues like many stocks do. Private equity firm Privateer Holdings announced last week that it wouldn't sell any of its Tilray shares immediately after the lockup period expiration. This announcement was tremendously important because Privateer Holdings owns around 76% of Tilray's outstanding shares.
Privateer Holdings has an important connection with Tilray other than being the largest shareholder. Brendan Kennedy is the co-founder and executive chairman of the private equity firm. Kennedy also happens to be the president and CEO of Tilray. While there certainly must have been a temptation to lock in some profits with Tilray stock up more than 330% since its IPO, Kennedy also knew what impact a big sell-off would likely have on the marijuana producer's share price.
However, Privateer Holdings didn't commit to holding its Tilray shares forever. The firm stated that it won't sell any of its position in Tilray in the first half of 2019. What happens after then? Privateer Holdings managing partner Michael Blue said, "When we decide to distribute shares, we will do so in an orderly and deliberate manner."
Such an "orderly and deliberate" approach for Privateer Holdings in selling its Tilray shares at some point in the future should work to Tilray's benefit. The primary problem with IPO lockup period expirations is that shares are often dumped on the market for sale all at once. If Privateer Holdings upholds its commitment (and there's no reason to think that it won't), this kind of scenario shouldn't occur for Tilray.
With the threat of a sell-off related to the IPO lockup period expiration now gone, investors can focus on the more important matter for Tilray: its prospects. And those prospects continue to look quite good.
The opportunity that receives the most attention is the Canadian recreational marijuana market. Tilray is an excellent position to perform well in this market. The company inked supply agreements with seven Canadian provinces and two territories. It's negotiating with two other provinces for supply deals.
Although Canada hasn't finalized regulations yet for cannabis edibles, Tilray is poised for success in this potentially massive new market as well. The company already has a line of edibles waiting in the wings. Tilray also formed a 50-50 joint venture with large beer maker Anheuser-Busch InBev to develop non-alcoholic cannabis-infused beverages for the Canadian market.
But international opportunities for Tilray are even bigger. Currently, 41 countries have legalized medical cannabis. Tilray already ships to 12 of these countries, notably including Germany, which has a population more than twice the size of Canada's.
Tilray also has significant room for growth in consumer products. The company recently signed a deal that makes Tilray the preferred supplier of cannabinoids, including cannabidiol (CBD), for Authentic Brands Group (ABG), which owns a large portfolio of global lifestyle and entertainment brands. This agreement also gives Tilray the right to receive up to 49% of net sales of ABG-branded cannabis products.
Good but not great
The global cannabis market will be huge. Tilray's opportunity will be huge. It's not hard to envision Tilray stock doubling or more over the next decade. In my view, though, the problem for Tilray is that there are even better marijuana stocks to buy.
Tilray's projected production capacity is well below several of its peers that have lower market caps. While Tilray formed a joint venture with AB InBev, other rivals landed much more impressive deals with major companies outside of the cannabis industry. Their relationships are significantly closer than the one between Tilray and AB InBev -- and they filled the marijuana producers' coffers with cash to use in expanding operations.
The bottom line is that Tilray is a pretty good marijuana stock, especially with the uncertainty surrounding its IPO lockup period expiration now in the rearview mirror. However, is Tiray a great marijuana stock? I don't think so.