Let’s get straight to the point. The only reason to own Tilray (TLRY) stock is whether the business opportunities justifies the rich stock valuation, not whether the CEO sells his shares.
Privateer Holdings Lockup
A big risk with Tilray when the stock was trading all the way to $300 following a hot IPO was whether the insiders would dump shares via their holdings in Privateer Holdings. The extended lockup agreement announced Monday extends the lock-up period of what amounts to 75 million shares or 77% of the outstanding shares.
Privateer Holdings is a venture fund that was co-founded by CEO Brendan Kennedy. Any attempt by the CEO to unload a material number of shares would crush the stock.
These large Canadian cannabis stocks like Tilray sold the market on the massive global opportunity in the cannabis sector that approaches $200+ billion over the next few decades. Any decision by a leading executive in the sector to sell shares would surely crush the sector stocks.
The lockup story isn’t as meaningful with Tilray trading for sub-$40 following an extended period of weakness. The market valuation got far ahead of the short-term business prospects.
As well, an extended lockup of two years doesn’t exactly eliminate the risk that the insiders dump these shares in the future. All the move does is delay the decision and leave an extended overhang on the stock.
Analysts forecast Tilray generating revenues in the $376 million range in 2020 and up to $545 million in 2021.
While a lot of the growth is built into general cannabis market expansion and acquisitions like Manitoba Harvest, the company isn’t guaranteed to generate a big profit in the competitive cannabis sector.
Tilray had minuscule gross margins of 23% in Q1 leading to an adjusted EBITDA loss of $14.6 million. The losses declined slightly from $17.8 million in the prior quarter.
The Canadian cannabis company is far from producing positive income when revenues of only $23.0 million are generating substantial losses.
The Manitoba Harvest business remains a big question mark here with the FDA not approving CBD-infused food and dietary products and questioning the general safety of CBD-infused products due to a lack of safety studies. Tilray paid over $300 million for this company with an intent of using their 16,000 retail store distribution network in North America to aggressively move into CBD-infused products such as food, beverage and wellness products.
The key investor takeaway is that investors are falling for the hype in the sector again. The key executives and CEO that control Privateer Holdings have no ability to unload shares at the current valuation without crushing the stock so an extended lockup doesn’t matter.
Tilray has large EBITDA losses and a business model reliant on the U.S. CBD-infused food market that is suddenly thrown into regulatory questions due to statements by the FDA. The company announcing an extended lockup was just for effect due to the executives having no reasonable path to unloading stock in the next couple of years anyway. Investors should use any rally to unload Tilray shares and move into multi-state operators focused on the U.S. cannabis sector trading at lower market valuations.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.