With a valuation near $7 billion, Tilray (TLRY) is a long-term story. It has to be if you are a buyer.
Even as sales continue to climb rapidly, $15.5 million for the most recent quarter and $43.1 million for the full year, you aren't going to win any valuation arguments.
Heck, even if you compare the company to other cannabis companies, you are going to struggle. Worse, the $0.33 loss per share in in the fourth quarter was much worse than the expected $0.12 per share Wall Street anticipated.
This quarter's report makes a buying argument challenging, so where are buyers coming from?
Full-year revenue doubling (up 110%) to $43.1 million helps as expectations for some investors is growth will be parabolic as supply accelerates to meet voracious demand. The 203.8% revenue growth in the fourth quarter highlights that fact.
Total kgs sold (6,478) doubled, but this still trails names such as Aurora Cannabis (ACB) and Canopy Growth (CGC) . The good news is the average selling price per gram increased to $7.52 from $7.13 year over year.
However, the biggest draw for TLRY may be its partnerships, acquisitions, and joint ventures. The company has avoided taking a big payday from a single name in exchange for pursuing relationships it can control. Unfortunately, I believe this will result in a need for additional capital before some of its largest peers, but with the right partners it could prove to be a win over the long-term.
Tilray holds a strategic alliance with Sandoz, a division of Novartis NVS, for medical cannabis product development. It also has a joint venture with Anheuser-Busch InBev BUD to develop non-alcoholic THC and CBD beverages. Each company will contribute $50 million - $100 million into the venture.
Furthermore, Tilray holds a revenue-sharing agreement with Authentic Brands. Additionally, it has acquired Manitoba Harvest, Natura Natural Holdings, and Alef Biotechnology. My concern is I still see all of these as a short-term drain on capital, capital that will evaporate quickly as the company is nowhere near cash flow positive yet.
Tilray has been public less than a year. Unfortunately, the company was not able to take aggressive advantage of the short-squeeze back in the late fall of 2018. The tight float and aggressive short-selling resulted in a cannabis squeeze for the ages. The short interest is back in the low single digits while the company still enjoys one of the smallest floats for a cannabis company. It is likely the biggest reason valuation remains near $7 billion.
Price compression has created a tight descending triangle pattern on the weekly chart. A close below $67 or above $75 should ignite a big move in the stock. I'd measure it as $25 higher and $17 lower.
While this sounds favorable to the bulls, descending triangles more often resolve to the downside and the stock is clinging to support currently with most secondary indicators bearish. In other words, the likelihood of a breakdown outweighs the probability of a breakout, so the raw upside and downside targets do not adequately measure risk versus reward.
In the sector, I see better names than Tilray in the short-run. While it holds solid potential in the long-term, the risk here doesn't appear to justify the potential reward. I'd be more interested after the company receives a cash infusion or we see the valuation fall into the low-single-digit billion number.
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