When investing for growth, it helps to have an appreciation for the general pace that different investments tend to multiply in value given certain economic conditions. A major pharmaceutical company like AbbVie (ABBV -0.95%) and a rising cannabis company like Tilray Brands (TLRY +0.34%) operate in different industries and have several other characteristics that make proper comparisons complicated.
Tilray's smaller size and strong position in a rapidly growing industry would suggest to some that its stock has great potential to 5x in value relatively quickly. But that's assuming the current downturn in the economy doesn't cause it to stumble into stagnation from lack of profitability. In contrast, AbbVie's got a large pipeline of potential new pharmaceuticals its developing. This pipeline regularly churns out new treatments and makes for relatively steady growth, but it also suggests little potential for the stock to leap upward in a short time span.
So, which of these two businesses is more likely to see its stock 5x first?
NYSE: ABBV
Key Data Points
Will slow and steady expansion win the race for AbbVie?
For AbbVie to 5x, it will need to keep successfully developing and commercializing new medicines, and delivering clinical trial results strong enough to convince regulators to add new indications to the drugs in its existing portfolio. In more concrete financial terms, 5x gains would mean it reached a market cap topping $1.2 trillion.
From the end of 2016 to the close of 2021, AbbVie's total revenue grew at a compound annual rate of around 16% to $56.1 billion. It did that while remaining firmly profitable and growing its quarterly free cash flow by 242.5%.
The trouble is, management doesn't expect that pace of top-line growth can be maintained. Patent exclusivity in the U.S. will soon expire for its psoriatic arthritis drug Humira, which brought in $5.3 billion in net revenue in Q2 of this year alone. Humira is among the highest-grossing drugs of all time, but once biosimilar versions hit U.S. pharmacies next year, its sales will start to erode. As such, the company's top line could well be flat in 2024 and produce somewhere less than 10% annual sales gains for the rest of the decade.
New business variables make such speculations just an educated guess, But if AbbVie's current price-to-sales multiple remains constant at 4.3 and its annual revenue growth rate stays at 9%, it's likely to reach a market cap of around $371.1 billion by 2030 (its current market cap is $255 billion). That suggests steady, admirable growth, but it's nowhere close to 5x gains, even if everything goes according to plan for the foreseeable future.
Federal cannabis legalization would be a big boost for Tilray stock
Canadian cannabis company Tilray isn't as reliant on new drug development to expand its sources of revenue. It just needs to keep penetrating the markets it operates in and develop new markets, preferably while making progress toward profitability. It would, however, benefit hugely if efforts to legalize cannabis use in the U.S. are successful. This would massively grow its total addressable market.
NASDAQ: TLRY
Key Data Points
According to a study by Research and Markets, the global legal cannabis market is forecast to grow at a compound annual growth rate of 25.3% through 2030 and be worth around $134.4 billion by then. Tilray is a global operator with different shares of various markets (its roughly 20% in Germany for instance, but only about 12% in Canada). So coming up with its share of the global market isn't easy to calculate. Tilray is one of the largest cannabis companies in the world by revenue, and if it were able to lay claim to even a conservative 7% share of the overall market in 2030, that would equate to eventual annual revenue of around $9.8 billion. Again, all these variables change over time so this is only an educated guess, but if its present price-to-sales ratio is 2.4 were maintained in 2030 (a big "if"), the estimated revenue of $9.8 billion would result in a market cap of $22.5 billion -- far more than 5x its current market cap of around $1.9 billion.
Even if Tilray fails to capture exactly that estimated portion of the market, it still has real potential for outsized valuation growth before the decade is out. The big catch here is that Tilray isn't profitable yet, which means it'll need to either raise a lot more capital from issuing new debt or issuing new shares of its stock to finance its efforts to penetrate new markets between now and 2030 in order to capture that revenue. Those moves could dilute current investors' shares even further, not to mention introducing the risk that the company will become overly indebted and lose out on growth because it's burdened with costly interest payments. See what I mean about complicated comparisons?
Which stock is more likely to 5x?
There are likely too many "ifs" involved right now to say whether Tilray stock will even grow 5x. And we've already demonstrated how difficult it will be for Abbvie to reach that level. So, I'm not sure either will hit that level of growth any time in the next decade. I can confidently say that Tilray is a much more speculative stock, especially in comparison to a stably expanding business like AbbVie.
But if I was forced to pick one, Tilray stock is significantly more likely to 5x before AbbVie, as its market catalysts have more potential for outsized growth, its got a much smaller starting size, and it has an easier path to hitting greater relative growth.
