In this episode of MarketFoolery, host Mac Greer and Motley Fool analysts Andy Cross and Emily Flippen take a look at two of the market's biggest stories. Tilray (NASDAQ: TLRY) fell a bit on earnings today, and that's after falling to around $70 from highs near $300. Tilray's not exactly a value buy, though, trading for 160 times revenue.
Tune in to find out why long-term investors should avoid Tilray like the plague, and where they can look instead for exposure to what could be a very big, if low-margin, industry. Then the hosts break down Netflix's (NASDAQ: NFLX) decision to say, "Thanks, no thanks" to Apple's (NASDAQ: AAPL) new streaming service. Who will win in the streaming space? How can Netflix compete with so many deep-pocketed giants? Tune in to find out more.
A full transcript follows the video.
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This video was recorded on March 19, 2019.
Mac Greer: It's Tuesday, March 19th. Welcome to MarketFoolery! I'm Mac Greer. Joining me in studio, we have Motley Fool analysts Andy Cross and Emily Flippen. Welcome! How are we doing?
Andy Cross: Mac, we're great!
Emily Flippen: Yeah, doing great! Good morning!
Cross: I love being on the show with Emily! This is a real treat for me!
Flippen: [laughs] We don't get to do it often, do we?
Cross: I know! This is great! Looking forward to it!
Greer: Good. Let's make the magic happen! We've got a lot of magic here. We're going to talk some Netflix and Apple not playing well together. We'll get to that.
But we begin with marijuana stocks. Canadian cannabis producer Tilray down a bit on earnings. Emily, this was after they reported that sales nearly tripled, but they also reported a wider-than-expected loss. This company is losing a lot of money. I want to get your take on Tilray, but first, a quick walk down memory lane. The company went public back in July. Fifty-two-week-low of around $20 a share, high of around $300 a share. Today, the stock trades in the 70s. What do you think?
Flippen: Let's be clear, when we talk about sales growth, their sales growth is only up about 55% quarter over quarter, which might sound good to somebody who's comparing the marijuana industry to the retail industry or something along those lines, but competitors were growing faster than Tilray. While the top line seems to be growing strong, when you look at how that's actually flowing down to the bottom line, and how that impacts investors, it's a much different story. I think when you look at ` as a company, the biggest thing that would concern me -- and I'm not a shareholder; actually, it's on the avoid list for our marijuana service here. I'm not a huge fan, I'll just put that out there. But they issued $420 million worth of convertible debt, and that's virtually all of the cash that they have. And they're burning cash. So to me, they're taking a lot of moves that are diluting shareholder value, all while trading at a price-to-sales ratio of 160 times.
Cross: Wait, I'm sorry, is that expensive? A hundred and sixty times revenues?
Flippen: Well, it's a little pricier than I'd like to pay, to say the least!
Cross: For reference, the S&P trades at like 2.5 times sales. Granted, Tilray is growing far faster than the S&P.
Greer: So, richly valued.
Cross: Richly valued, yes.
Flippen: Which is a generous way to describe it. Ultimately the issue then becomes, OK, there's a lot of premium priced into Tilray and where investors expect Tilray to go. They're still burning through cash. How much longer they can do that..? Well, now they have all this debt, so we know at least a little while longer. But the concern there is, a lot of these stocks, Tilray included, are flying high on valuations. As an investor, it makes me extremely nervous.
Greer: I hear some healthy skepticism. Is that fair?
Flippen: Probably an extra dose. Some extra healthy skepticism.
Greer: What's the good news? If you were to take the other side of this, and having just heard what you said, if five years from now, this stock and this company is wildly successful, what happened? What did you miss?
Flippen: There are many things I could be missing, two big ones. The first one is key alliances in this space. Tilray has done a great job of setting up some key alliances. Everybody's familiar with Anheuser Busch and their push into the CBD beverage industry. They also furthered their alliance with Sandoz, a drug maker. The cannabis space in general depends a lot on expanding those relationships, and Tilray has managed to do that.
Also, nobody really knows how large the marijuana industry is. If it turns out that this industry is huge, which it very well could be, and Tilray becomes the main supplier of medical cannabis and recreational cannabis, both of which they were selling last quarter, then it can mean that this valuation is somewhat deserved.
Greer: Andy, along those lines, Tilray CEO says, this is a quote, "We're still in the early stages of the global transformation of a $150 billion worldwide industry."
Cross: Well, he hopes so. I think he owns a majority of the stock through an investment vehicle on his own. He's got a lot riding on this, his reputation, the business. Clearly, when you think about the push, certainly in Canada, also in the United States, and the move toward medicinal and recreational cannabis use, all forms, the market -- as Emily said, we don't know exactly how large it is, but we're in an early stage. Finding growth companies that can truly benefit from that kind of investment and that kind of growth in consumer behavior could be a very profitable way to make an investment. I will say, as we talked about with a company like Tilray, that's on our avoid list because of the valuation. The volatility around these markets is going to be exceptional. If you're investing into the cannabis space, as we talked a lot about in our services that Emily helps lead, you have to be prepared for the volatility because it will come.
Greer: Speaking of that, I mentioned earlier the stock price. Fifty-two-week low around $20. Fifty-two-week high around $300. Today in the 70s. You're saying that I should not anchor to that $300, right?
Cross: [laughs] Definitely not!
Greer: Not necessarily a bargain at $70?
Cross: Definitely not. A stock like this will definitely be one of the more volatile in this space.
Greer: OK, let's broaden it out a bit and talk about the industry in general. Marijuana now legal in Canada. But under federal law, Emily and Andy, it is still illegal in the U.S. But -- and there's a but here -- medical marijuana, legal in 33 states plus D.C. Recreational marijuana, legal in 10 states plus D.C.
Flippen: About to be 11, too, it seems, with New Jersey. The United States is rapidly moving toward legalization. I've said this reckless prediction a few times, but my theory is that by 2020, we have federally legal recreational marijuana. I don't think a single presidential candidate is going to run on the platform of keeping marijuana recreationally illegal. It's going to be such a hot-button issue.
That being said, it is still federally illegal, so a lot of these companies right now are operating in a pressured environment, to say the least. But as states begin to loosen the reins and as these companies get more opportunities to expand, there is going to be shakeout in the industry. You're going to be able to see which companies really have the chops to perform in what will likely be an extremely low-margin business and which ones simply don't have the gall or the capital to sustain themselves.
Greer: That's a beautiful setup for my new game. I call it Very Concerning, Somewhat Concerning, or Not at All Concerning. Ready? As an investor, I'm going to spot you up with something involving the marijuana industry. I want you to tell me whether it's very concerning, somewhat concerning, or not at all concerning. Let's begin with what Emily just mentioned, marijuana being illegal at the federal level.
Flippen: Not at all concerning.
Cross: Not at all concerning.
Greer: Marijuana stock valuations.
Cross: Very concerning.
Flippen: Very concerning. [laughs]
Greer: Number of competitors.
Flippen: Somewhat concerning.
Cross: Yeah, somewhat concerning. Emily mentioned this, with the consumer product goods companies getting more involved in the space. We saw a company like Philip Morris actually make a big investment in Juul, which is an e-cigarette company, pushing for different ways to grow their brand. The large players, how do they play into the cannabis space?
Greer: At our recent Motley Fool event in Austin, Andy, Bill Mann mentioned that he thought Philip Morris could end up being one of the ultimate winners in this space. Do you agree with that?
Cross: Could be, maybe. I don't know if I necessarily have that much vision or confidence in that statement. I mean, I respect Bill, but --
Greer: [whistles] Those are some fighting words.
Cross: [laughs] Yeah, exactly, respect Bill Mann? No, I'm joking. I love Bill! When I think about the profitability of Philip Morris, the amount of capital they generate and put to invest, and the fact that their core market is obviously shrinking, and they make this big investment into the Juul e-cigarette, they bought 35% for $13 billion. They'll put capital to work where they think they can get a return. I don't know if it's them or if it's another one of the consumer products goods companies.
Flippen: For me the competition is twofold. It is a consumer products industry. You're going to have extreme competition for brands. To me, what's going to make marijuana really interesting is, I'm a believer in the fact that the recreational use is going to be the biggest driver of sales moving forward. It comes down to, as consumers, how you buy and consume marijuana. For me, a lot of it depends on brand. Same is true for THC products, also CBD products. It requires that company to have a really strong brand, have loyal customers coming back, possibly paying a premium for their products.
Then, you have this entire other collection of companies which don't really have the same competition because they're ancillary. We talk about alcohol companies being some of those companies that are exposed to the marijuana industry with the potential for infused beverages. Companies that focus on dehydrating marijuana products, companies that focus on packaging marijuana products. All of these companies that don't necessarily physically own and grow marijuana or try to sell marijuana but help companies that do.
So competition, it is concerning in the sense that it's going to be stiff competition for those pure-play marijuana companies. But I only say somewhat concerning because there's a lot of companies out there that are poised to succeed that don't necessarily have that same intense competition that we're seeing.