At What Price Is Tilray Worth Buying?

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This is a company that's also done an excellent job of pushing into overseas markets, either through direct involvement in growing, via exports, or through distribution partnerships. According to a January presentation from the company, it already has a presence in one dozen countries, and could easily work its way into additional markets. These overseas sales channels will come in particularly handy over the next two or three years if dried cannabis flower does indeed become commoditized and oversupplied. Without overseas outlets, domestic producers run the risk of not being able to offload their excess supply without wrecking their margins. 

With the exception of Canopy Growth and its widely known Tweed brand, arguably no company has also done a better job of building up its brands, particularly within the medical community. Tilray's predominant focus on medical marijuana patients will narrow its consumer pool, relative to the broader recreational market. However, medical patients are also much more likely than adult-use consumers to purchase alternative cannabis products, such as oils, that have much higher price points and juicier margins.

Lastly, let's not forget that private-equity fund Privateer Holdings owns close to 80% of all outstanding shares of Tilray. With Privateer announcing in January that it had no plans to sell any of its stake until at least the second half of the year, it's a vote of confidence in favor of Tilray's execution.

Arguments against buying Tilray right now

At the same time, there are a number of very good reasons Tilray should be left on the shelf for the time being.

Topping the list of complaints is the company's aggregate production. Despite boasting one of the highest market caps among pot stocks, Tilray ended 2018 with just 912,000 square feet of completed facilities, of which just over 850,000 square feet was devoted to growing space. When combined with the nearly 250,000 square feet of growing space being developed in Europe, Tilray might have around 100,000 kilos in peak annual output at its disposal.  While this places the company among the 11 growers that are projected to hit the 100,000 kilo mark in annual output, investors can purchase growers with a similar peak annual output that have a tenth of the market as Tilray. That doesn't make any sense.

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While Privateer Holdings' large stake is a positive for Tilray, it also serves as a bit of warning, too. Considering that Tilray's share price plunged 17% on its lock-up expiration in mid-January, and only about 10% of all outstanding shares became available for trade then, imagine what happens when this behemoth shareholder begins to unwind a portion of its position. I don't foresee a way that Privateer can exit its positon in an orderly fashion without putting a ton of pressure on Tilray's share price.

Investors would also be encouraged not to forget about the bottom line, especially with adult-use marijuana now legalized in Canada. Despite rapidly rising sales, Tilray is nowhere near a point where it has a chance to be profitable on an operating basis. In fact, with the expectation that Tilray will need to spend copious amounts of money on additional capacity expansion, medical marijuana research, branding, and marketing, it's unclear if Tilray will have a shot at profitability at any point prior to 2021. That's a long time to wait while its smaller peers push toward recurring operating profits.

Finally, even though I agree that Tilray is wise to focus most of its efforts on high-margin medical weed patients, what effort it has put toward the recreational market hasn't been differentiable. By that I simply mean that while Tilray is a medical marijuana standout, especially with its branding, it's not really making any noise with casual consumers. To me at least, that's a lost opportunity.

Here's the price where Tilray becomes attractive

Now that you've heard both sides of the story, I can get to the meat and potatoes of the initial question: At what price is Tilray worth buying? Taking into account all of the above variables, I view $38 to $42 as a range where Tilray would offer value for investors.

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At just under a $4 billion market cap, we'd be taking into consideration Tilray's soon-to-be existing run-rate of around 100,000 kilos a year, as well as the nearly 2.9 million square feet of land that it's yet to develop, which easily could double its capacity. Of course, doubling capacity is a time-consuming and costly venture that'll take years to pay benefits. That's one reason I wouldn't suggest overpaying for the Tilray name.

According to Wall Street estimates, which I should warn are very fluid in the early going and could change dramatically in the quarters to come, Tilray could near $1 in EPS by 2021. But even then, we're talking about a company valued at more than 11 times sales and closer to 75 times its 2021 earnings per share that's ramping up at a much slower pace than its peers. Although I do value its partnerships and its superior medical cannabis branding, I'm not going to bestow billions of dollars in added valuation because of these factors.

At between $38 and $42, Tilray would, in a best case scenario, be trading at perhaps eight times 2021 sales, and maybe under 50 times its earnings per share that year. Given the high expensing that'll likely occur between now and the end of 2021, this share price range would adequately reflect the risks facing Tilray but still give investors the opportunity to benefit over the long run.

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