The marijuana industry is transforming at a rapid pace. What had once been considered a taboo and highly risky investment arena is now a legitimate business model that's rolling out the red carpet for investors. By 2022, according to Arcview Market Research and BDS Analytics, global weed sales could hit north of $31 billion, which would represent more than a tripling from global cannabis sales in 2017.
It's no longer a matter of whether the marijuana industry will survive. Now, it's a question of which companies will thrive.
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In 2018, arguably no company ascended to the heavens faster than Tilray (TLRY +0.00%), which became the first Canadian pot stock to go the initial public offering route on a major U.S. exchange. In a two-month span, Tilray's share price ran from its list of $17 per share to an intraday peak of $300. It was like the dot-com era all over again. Even after having given back three-quarters of its gains since hitting $300 on an intraday basis, it's still either the second- or third-most valuable pot stock by market cap, depending on where it and Aurora Cannabis are trading any given day.
But the bigger question is, should Tilray be on your buy list? With valid arguments on both sides of the aisle, let's take a closer look.
Three reasons Tilray could make you a marijuana millionaire
Possibly the top reason Tilray should be considered as a long-term buy is the company's ability to attract brand-name partnerships. Whereas peers such as Aurora Cannabis and Aphria are still struggling to land a major partner in the beverage, tobacco, or pharmaceutical industries, Tilray has managed to nab a partner from two out of three of these industries.
In December, Tilray announced a global distribution partnership with Novartis' generic-drug subsidiary, Sandoz, for non-combustible cannabis products. This was actually more of an expansion of an agreement already in place with Sandoz from earlier in 2018, whereby Novartis' subsidiary would act as a distributor within Canada.
Also in December, Tilray formed a $100 million joint venture with Anheuser-Busch InBev (BUD 0.55%). Tilray and Anheuser-Busch InBev will put up $50 million each to research and develop cannabis-infused beverages, which are expected to be legalized by no later than mid-October 2019. This was an especially powerful win for Tilray, given that Anheuser-Busch InBev CEO Carlos Brito had no intention of entering the pot market as recently as June 2018.
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Second, investors will appreciate the company's brand-name medical marijuana products, as well as its push to diversify into higher-margin cannabis alternatives. Whereas dried cannabis flower is the best known sellable product, it tends to carry the lowest margins relative to other pot products because of oversupply and commoditization over time. Tilray's focus on medical marijuana research, cannabis oils, hemp, and other alternative products that are geared at medical marijuana consumers should lead to superior long-term margins. And, as noted, being one of the first licensed producers has allowed Tilray plenty of time to build up its brands and improve consumer engagement.
Third and finally, it's a positive that private-equity firm Privateer Holdings owns close to 80% of all outstanding shares of Tilray. Having one gigantic presence backing this stock demonstrates that folks with money expect it to execute on its long-term strategy.
Three valid arguments why Tilray could be toxic to your portfolio
However, there are also reasons to believe Tilray could completely flop.
One of the biggest red flags with Tilray is that its production isn't anywhere near on par with its larger peers, and management has yet to say much about what the next steps are with regard to expansion.
Before the company went public, Tilray released plenty of details in its S-1 prospectus filing with the Securities and Exchange Commission. As of June 2018, the company expected to have 912,000 square feet of facilities developed by the end of 2018, with just over 850,000 square feet devoted to growing space. The problem is this might only yield around 80,000 kilograms annually, whereas Canopy Growth, Aurora Cannabis, and Aphria should produce around 500,000, 700,000, and 255,000 kilos, respectively, at peak output. Tilray simply isn't on par with its peers in the production department, and despite having close to 3 million square feet of expansion space, it has yet to divulge any specifics of what's next in terms of capacity expansion.
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Second, having Privateer as a major shareholder might also be bad news. When the company's lock-up expiration hit on Jan. 15, Tilray's stock took it on the chin and fell 17%. The scary thing is that only about 10% of the company's outstanding shares were actually available to be sold on that date by insiders, with Privateer Holdings issuing a statement that it wouldn't consider selling any of its stake until the second half of 2019. But if and when Privateer does sell some of its stake, it could seriously weigh down Tilray's share price.
Check out the latest Tilray earnings call transcript.
Last, but not least, Tilray isn't anywhere close to turning an operating or bottom-line profit. There's no doubt that sales will spike notably higher following Canada's legalization of recreational marijuana and the company's push into hemp. But Tilray will be busy using its capital to research cannabis products, enter new markets, market its brands, and presumably expand its growing capacity. These higher expenses could easily keep Tilray in the red for years to come. That makes it off-limits for fundamentally focused investors.
Now that you've heard both sides of the story, all that's left to decide is whether Tilray belongs in your portfolio.
