Tilray’s (TLRY) enthusiastic IPO in July and the stock’s subsequent high jump to $13.27 billion valuation have put the entire cannabis industry in the scanner. Skeptics see the soaring valuation as a sign of a bubble, thanks to its outlandish fundamentals.
Tilray is doubtlessly overpriced at the moment. However, this may be one of those occasions when you need to read the market, not from the numbers, but from the possibilities.
With Canada legalizing the recreational use of marijuana next week, a pot market with potential for about $10 billion in sales will open up. Major players including Tilray, Canopy Growth (CGC) and Aurora Cannabis will battle it out with over 100 smaller players in Canada to capture a major share of the market.
Ahead of the legalization next week, all these companies are using up their cash reserves to invest in production and distribution activities. However, since the Canadian market is not huge enough to feed all these players, many firms are definitely going to fall apart in the next one-year period.
Though the global pot market is expected to grow to around $220 billion by 2030, no other region apart from Canada is likely to see an immediate legalization of marijuana. Even the best bets – the US and Europe – will take some time before full-fledged legalization is in place. Therefore, for the time being, pot companies are restricted to a smaller market.
With high confidence and more resources to back its operations, Tilray and Canopy are expected to have an edge over smaller players in the Canadian market. Since both the companies operate in two different sub-segments, it is likely that both will co-exist without causing much damage to the prospects of the other.
So Tilray or Canopy?
At the moment, Canopy would prove to be a better bet than Tilray, primarily because of two reasons. One, Canopy is slightly less overvalued than Tilray. Two, analysts’ projections indicate that Canopy will post higher topline growth in 2019 than its rival.
Separately, Constellation Brands’ (STZ) recent $4 billion investment in Canopy gives it more firepower to boost revenue growth. This is compared to Tilray, whose cash reserves are just over $25 million.
Meanwhile, if you can wait till the prices to drop to a more reasonable level, it would probably count as a better investment decision.