I am not the biggest fan of the current price of Tilray’s (TLRY) stock. It is overvalued by leaps and bounds. But, now that the lockup period is over from Tilray’s IPO, the company is leveraging its overvalued stock and purchasing other companies. These moves are strengthening its future and the company’s global ambition and, given the fact that the stock is so overpriced, Tilray is doing it on a relatively cheap basis.
Tilray Makes Big Acquisitions
The latest deal that Tilray has undertaken is to acquire the world’s largest hemp dealer. Tilray has agreed to purchase Manitoba Harvest for C$419 Million ($317 million USD). Manitoba had revenue of $71 million last year in hemp food products. This is well above what Tilray is expected to generate in revenue this year by itself (Tilray reported $36M for FY 20018). Tilray will provide both cash and stock for the acquisition of this deal.
The other event that occurred is the passage of the latest version of the Farm Bill which took CBD products off of the Schedule 1 status making it no longer enforceable by the DEA. Because of that Canadian companies have been moving to do deals with companies in the United States and build on their footprint of cannabis products including THC based, CBD based or hemp based products.
Two events have made this deal possible. First, Tilray had a lock-up period after its IPO that expired on January 15th. Now the company can use its stock to purchase companies, a move that Tilray just did in a retail partnership with Authentic Brands just last week.
But, it is the particulars of the Tilray deal that I love the most. As I mentioned, Tilray’s stock is over priced based upon what the company can bring in via revenues and earnings. Tilray has the capability of producing only about 145,000 kg. of cannabis annually. That puts their revenue at about $750 million annually. With a 17% net margin and 20-times earnings, the company could be worth about $2.5 billion on its best days. Currently, the market capitalization of Tilray is worth about 3 times that at $7.5 billion.
Don’t bet the farm in shorting the stock, however. I have shorted Tilray a few times and done well with the positions (I currently have no positions on Tilray). But, the stock price was much higher before. Now, Tilray’s stock remains lofted and stubbornly will not move lower.
Think about the mathematics of the latest deal. First, the stock is overvalued by 3-times. Currently, the stock is trading at $75.00 per share but, I feel the company’s stock could be trading at $25.00 per share. With the latest deal, Tilray is issuing new stock at the $75.00 price. In essence, this dilutes current shareholders, which in theory would drive the stock downward. But, the stock is overvalued by such a large amount that there is an inherent value in the deal that would keep the stock price lofted. After all, Tilray just spent stock worth $25.00 per share and got $75.00 per share in value.
I look for Tilray to continue to capitalize on their current situation with an overly valuable stock price, limited float, and the ability to create deals at a fraction of their true cost. This could bring in a significant amount of value to the company and its shareholders despite the diluting of the stock investors. In a perverse way, this adds a tremendous amount of value to an overly priced stock. Genius.
Check out the articles in this category focused on cannabis stocks. By gaining a strong foundation in both the fundamentals and technical details usually involved in cannabis stocks, you’ll be able to invest with greater confidence.
