It's been two weeks since Jefferies analyst Owen Bennett initiated coverage of Aurora Cannabis (ACB) a "buy" rating, arguing the company is priced attractively relative to its two closest rivals in Canadian cannabis stocks, Canopy Growth (CGC) and Tilray (TLRY).
On Friday, Bennett took the next logical step -- and initiated Tilray at "underperform," with a $61 price target, which implies nearly 13% downside from current levels.
In reaction, Tilray shares tumbled nearly 8% to $69.72, leaving the stock in negative territory in 2019.
Now, it's not that Bennett thinks Tilray is utterly without hope. To the contrary, the analyst had plenty of nice things to say about Tilray. For example, Nanaimo, British Columbia-based Tilray is said to be well positioned in the Canadian market for medical marijuana, and has about an 8% market share in that niche of the pot market. Tilray is also leading in researching medical uses for marijuana, and has the potential to expand this business broadly internationally, particularly in Europe, where Tilray has the "best" position in "EU manufacturing capacity."
That being said, Bennett worries that despite Tilray placing most of its emphasis on the medical marijuana market, it actually isn't even one of the top four players here. Its market share, although not insignificant, lags that of leading companies such as Aurora and Canopy Growth, which boast market shares in excess of 20% each. What's more, the analyst says that the "outlook" for medical marijuana outside of Canada remains "unclear," and in the near term at least, the analyst doesn't see medical marijuana contributing to earnings at Tilray.
Meanwhile in the recreational pot market, Bennett calls Tilray's business model "disappointing." Many of the company's brands, says Bennett, are not in fact Tilray's at all, but merely licensed -- and at that, licensed from its own majority shareholder, Privateer Holdings, which controls 75% of Tilray shares.
Yet another concern the analyst cited is production capacity, where Tilray is expected to be able to grow perhaps 125,000 kilograms of marijuana annually by the end of next year. That sounds like a lot, but rival Aurora is expected to be producing 325,000 kg by that point in time, and Canopy could be producing as much as 570,000 kg.
Speaking of Aurora and Canopy, by the way, Bennett places particular emphasis on Tilray's less attractive valuation, relative to its rivals. Based on trailing sales, Tilray stock is currently clearly the most expensive of these three pot stocks, selling for 204 times its trailing sales of $33 million. That's as compared to Canopy, which costs 134 times its $115 million in trailing sales, and Aurora Cannabis -- the cheapest (if still not exactly "cheap") of the three stocks at 87 times it $89 million in sales.
Looking out a couple of years and factoring in some pretty explosive sales growth, Bennett sees these multiples moderating significantly -- but not changing the relative valuation dynamics. Based on market expectations for likely sales in 2020, the analyst notes that Tilray sells for an enterprise value of 22 times projected 2020 sales. This will leave it still more expensive than either Canopy Growth (18.9x 2020 sales) or Aurora Cannabis (a relative bargain at 7.9x 2020 sales).
In Bennett's opinion, the logical conclusion of all this is that, if you can only buy one cannabis stock today, that stock should be ... not Tilray.
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