Tilray, a Canadian company that grows, cultivates and exports marijuana, has made quite an impression on markets since it IPO'd on to the Nasdaq two months ago.
Back in July it raised $164m at a valuation of $1.6bn. After a round trip which took the business to a $20bn valuation, at pixel it was worth over $10bn. More than either Under Armour or Rupert Murdoch's News Corp, to pick two other companies loved by, er, libertarian athletes:
Despite last weeks fall, Tilray's valuation still seems to be at hallucinogenic levels: 500 times last year's $21m revenues, or 112 times the $94m of profits estimated for 2021 by the two analysts to have published forecasts. For perspective, last year the fashion group Michael Kors, which has a similar stock market capitalisation, made $4.7bn of sales.
So is the market getting high on its own supply?
A regulatory sea change towards the sticky-icky is under way, no doubt. There are 9 US states, including Denver and California, where it was legal for recreational use. In 2011, there were none. For those seeking marijuana for medical reasons, the number of states expands to 31.
Investors may expect this trend to continue as, despite not being able to agree on much else, 7 in 10 American voters support weed's wider legalisation, according to a poll by American Progress.
Across the border Canada recently became the first G-20 nation to fully legalise, only the second country to do so after Uruguay.
So the potential market is large. In the US alone, Ackrell Capital estimate the market to be worth $120bn by 2030, with 60m consumers enjoying the green stuff, around a fifth of the current population. Analysts at Benchmark reckon the entire market globally “could exceed $200bn over the next 15 years”.
A big potential market, however, does not mean big profits if Tilray is fighting with competition for every dollar of revenue. There are 26 listed companies producing cannabis with sales of more than $2.5m per quarter, according to New Cannabis Ventures. A further 27 are expected to be publicly tradeable soon. The largest by revenues, Canopy Growth (stock ticker: WEED), did more than double Tilray's $9.7m of sales last quarter.
Rival start-ups aren't the only threat. Aware of the threat to alcohol's status as the go-to legal intoxicant, booze conglomerates are beginning to make forays into cannabis. In August $41bn Constellation Brands, which makes Corona and Modelo beers, announced a $4bn investment in Canopy, upping its stake to 38 per cent. Spirit-maker Diageo, according to a BNN Bloomberg report last month, are also looking to invest in reefer producers.
The alcohol industry, with its tight regulation, big brands and litany of competitors, may not be the worst comparison for the nascent legal ganja market. If Tilray was valued like, say, Constellation Brands, which trades at 7 times last year's revenues, according to S&P Capital IQ, its market cap would be $147m. Or in other words, to justify its $10bn market capitalisation, it would need to get to $1.4bn in revenues. That equates to around 219,000kg sold at 2017's price per gram of $6.52. Last year, Tilray harvested 6,780kg. It will have to double production five years in a row.
If Tilray is going to develop consumer, rather than medical products, it will also need to develop brands. While Alphaville has no expertise on product differentiation in marijuana, we do know brand building requires marketing. However, unlike the tobacco and alcohol markets, which largely matured outside of regulatory frameworks, marijuana will not have such luck. In liberalised California, for instance, weed adverts may not be placed on an interstate highway, within 1,000 feet of a school or in media where “where at least 71.6 per cent of the audience is reasonably expected to be 21 years of age or older”. It is fair to say prime time advertising slots, such as during the Super Bowl, may be out of reach.
One thing is for certain, however, Tilray has done pretty well for its investors. Or should we say investor, as private equity firm Privateer Holdings, whose backers include tech mogul Peter Thiel, control 81 per cent of the shares outstanding, according to Tilray's latest 10-Q. Thanks to a split share class, this equates to 93 per cent of the total voting power.
Privateer cannot sell any of its $8.1bn stake until January 15, 180 days after the IPO. Tilray's relatively thin free float, at 13 per cent according to Bloomberg, therefore may go some way to explaining the gyrations in the stock, as even small transactions make large waves in the market with so few shares available.
Still, investor exuberance isn't just limited to Tilray. Canopy Growth commands a similar valuation, $12bn, with similarly minute figures, $60m of revenues last year.
This hasn't stopped number crunchers trying to justify such figures, however. Benchmark Analysts, for instance, slapped a C$100 price target on Canopy Tuesday, which “assumes a 15x sales multiple on our 2023 sales estimate of C$5.2B, discounted back 4 years.” Right.
Related Links:
Cannabis and markets: High times at Tilray - FT
Tilray is nuts. When's the crash? - FT Lex
Tilray: smoke and fire - FT Alphaville
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