Tilray Inc (NASDAQ:TLRY) has been in the spotlight since its initial public offering (IPO) on the Nasdaq in July. Over the first two months, the company’s share soared 811% to $155.00 per share. Over the last week-and-a-half, Tilray’s share price went nuts.
Speculation on how the company will do once recreational marijuana becomes legal in Canada and news of an agreement with the U.S. Drug Enforcement Administration (DEA) sent the company’s share price into the stratosphere.
On September 19, Tilray’s share price touched $300.00 a share; that’s an eye-watering 1,664% increase over its July IPO price of $17.00 per share. This meteoric rise has many investors asking if Tilray should split its stock. There are a lot of reasons why talk of a Tilray stock split is more than just a little premature.
Tilray Was Once the Most Valuable Pot Company
Talk of a Tilray Inc stock split started to take shape after September 19, the day that Tilray overtook Canopy Growth Corp (NYSE:CGC) as the world’s most valuable pot company. On that day, Tilray’s share price spiked to $300.00 per share, giving it a market cap north of $30.0 billion.
Canopy Growth, which had held that title almost since its inception, had a market cap of around $10.8 billion.
Investors were stoked after Tilray Inc announced on September 18 an agreement with the DEA to import marijuana into the United States for medical research at the University of California San Diego. (Source: “Tilray Receives Approval from U.S. Government to Import a Medical Cannabis Study Drug for a Clinical Trial at the University of California San Diego Center for Medicinal Cannabis Research,” Tilray Inc, September 18 2018.)
Canopy Growth Regains Title
What a difference a few days can make. Fast forward to September 26, and Tilray’s share price has given up more than a little ground. As of this writing, Tilray’s stock price is hovering around $111.50 per share, with a market cap of $10.37 billion.
Slow-and-steady Canopy Growth meanwhile, is trading at around $51.75 per share with a market cap of $11.75 billion, making it the world’s most valuable marijuana company once again.
In just one week’s time, investors afraid of missing out on the next best thing have gone from calling for a stock split to taking a wait-and-see approach.
Tilray Inc Stock Split 2018?
Back in July, Tilray Inc raised $164.0 million in capital, giving it a valuation of $1.6 billion. At the time, that placed the company’s IPO at around $17.00 per share.
Investors were looking for Tilray to capitalize on the October 17, 2018 legalization of recreational marijuana use in Canada and growing support for the legalization of weed in the U.S.
Medical marijuana is legal in 31 states, the District of Columbia, Guam, and Puerto Rico. Recreational marijuana use is legal in nine states, plus the District of Columbia.
For investors, Tilray’s IPO came at the perfect time. Since then though, thanks to overly optimistic investors, Tilray’s share price has become, some might say, a little overvalued.
Even after retracing significantly from last week’s $300.00-per-share price, Tilray’s valuation is still at nosebleed levels.
At current levels, Tilray’s valuation is 495-times greater than last year’s revenue of $21.0 million, 253-times greater than the $41.0 million in revenue projected by analysts in 2018, and 67-times greater than the $153.0 million in revenue forecast for 2019. (Source: “Tilray, Inc. (TLRY),” Yahoo! Finance, last accessed September 27, 2018.)
For 2021, two analysts have forecasted earnings estimates of $94.0 million. That’s going in the right direction, but today’s valuation is still 110-times those earnings projections.
What About the Marijuana Market Size?
But doesn’t the potential market size of the marijuana industry point to Tilray’s stock going to hallucinogenic levels and support the idea of a stock split?
Admittedly, the potential market size for marijuana in the U.S. alone is massive—enviable, in fact. One estimate suggests that the U.S. market alone for weed could be worth $120.0 billion by 2030. Over the next 15 years, the global market could exceed $200.0 billion. (Source: “2018 Cannabis Investment Report,” Ackrell Capital, last accessed September 27, 2018.)
Big numbers indeed. And even though Tilray Inc got into the pot market in the early stages, it’s not alone. There is a lot of competition in the marijuana industry and it’s only going to get more crowded.
Right now, there are 26 publicly traded marijuana companies with revenues in excess of $2.5 million per quarter; 27 more companies are expected to IPO in the near term. (Source: “Public Cannabis Company Revenue Tracker,” New Cannabis Ventures, last accessed September 27, 2018.)
Tilray Inc Financials
That competition does not mean that Tilray Inc is against the ropes. Tilray is a huge company with a strong international presence in an industry that is in its infancy.
Tilray, which harvested nearly seven metric tons of cannabis in 2017, is focused on the production of pharmaceutical-grade medical marijuana in Canada and Europe and supplying high-quality cannabis products in Argentina, Australia, Brazil, Canada, Chile, Croatia, Cyprus, the Czech Republic, Germany, New Zealand, and South Africa.
Despite only being in existence for two years, Tilray Inc has a solid history of reporting strong revenue growth. It’s also been burning through a lot of money.
In the second quarter of 2018, ended June 30, Tilray Inc announced that revenue increased 95.2% year-over-year to $9.7 million. The second-quarter net loss widened to $12.8 million, from $2.4 million in the same prior-year period. (Source: “Tilray, Inc. Reports Second Quarter 2018 Earnings,” Tilray Inc, August 28, 2018.)
Total kilogram equivalents sold increased 97% year-over-year to 1,514 kilograms (3,338 pounds). It costs Tilray around $3.00 to grow a gram of cannabis, which in the second quarter, it sold for $6.38 per gram.
No Need for a Tilray Stock Split Yet
If Tilray Inc wants to make investors happy, it will have to learn how to become profitable—which could come in the next year or two. To justify its current valuation though, the company is going to have to produce a lot more marijuana.
But then, if it does, chances are good that investors will reward it prematurely with a higher share price, meaning, it valuation may never come down from the clouds.
In the meantime, Tilray Inc has rewarded its early investors. And it will continue to do so. The company continues to report strong revenue growth, new partnerships, and agreements.
At $300.00 per share, investors might want to see a TLRY stock split. But at current levels of around $111.00, it’s simply not needed. Tilray is the most expensive marijuana stock right now, but it is in a strong position and there is plenty of room for additional growth before management should consider a stock split.