Shares of Tilray Inc (NASDAQ:TLRY) rallied by more than 150% in August underscoring the company’s meteoric rise ever since it went public this year. The surge is already eliciting concerns as to whether the stock is overvalued given that it is trading at trading at 40 times expected 2019 revenue
Tilray Price Action
The rally followed the announcement that that adult-use recreational marijuana is set to open in October. Investors pushed the stock higher on reports the company remains well positioned to be one of the biggest beneficiaries with its revenues expected to clock highs of $500 million by 2021 as a result.
Investors also pushed the stock higher on the announcement that alcoholic companies are looking for a partnership with established cannabis companies, of which Tilray is one of them. The developments coupled with double-digit revenue growth in the second quarter all but continue to trigger renewed investor interest in the company seen as a good play for gaining exposure in the sector.
The stock is currently trading in a steep uptrend with every pullback emerging as a buying opportunity, from where buyers have joined and continued to push the stock higher. After a recent pullback from the 52-week high of $97, the stock faces support at the $86 handle on any pullback. A breach of the support level could see the stock dropping to the $78 handle, the next support level.
Given that the stock is trading in an uptrend, it is expected to continue powering high with the next stop expected to be the $97 handle which happens to be a critical resistance level.
Tilray bills itself as a global pioneer when it comes to cannabis research, cultivation, processing, and distribution with operations spanning five continents. The company sells its products to more than ten thousand patients in eleven countries. Headquartered in Nanaimo Canada, the company was incorporated in 2018.
Adult-Use Marijuana Market Opportunity
Since going public in July, Tilray Has continued to power high in the market and is now ranked as the third largest marijuana company in the world. Canada legalizing recreational use of marijuana is one of the catalysts that has continued to push the stock up the charts.
Market sentiments remain high that the company remains well positioned to carve a bigger piece of the recreational market share given its cannabis production capacity. With legal cannabis sales in the recreational market expected to clock highs of $6.5 billion, Tilray revenue is projected to be around $500 million.
Achieving a $500 million feet on revenue is an achievement that would allow the company to generate significant shareholder value given the free cash flow expected to come into play as a result. Amidst the estimates, the company has already received a purchase order from the Prince Edward Island Cannabis Management Company for the supply of adult-use cannabis.
The agreement underscored how focused and prepared the company is about pursuing sales opportunities in the adult use marketplace. The company is to fulfill the purchase order through its High Park Holdings subsidiary.
“We’re thrilled High Park will have the opportunity to expand our national reach and grow our retail network by supplying Prince Edward Island’s four cannabis stores with a safe, secure and reliable source of adult-use cannabis products,” said Adine Fabiani-Carter, Chief Marketing Officer at High Park.
Just like other cannabis stocks, Tilray has also rallied on Constellation brands acquiring a $4 billion stake in Canopy Growth Corp. the deal has already triggered talk that other alcoholic beverage companies would follow suit and invest in other cannabis companies. While Tilray is yet to sign a major partnership, sentiments are high that it could attract a deep-pocketed partner in the near future.
What Next For Tilray Growth
There is no doubt that Tilray looks heavily priced with the share price trading at 2021 price-to-sales ratio. The high valuation is not in any way supported by underlying fundamentals but how the company is poised to perform in future.
For the longest time, the stock has continued to power high on every pullback. It would not come as a surprise on the stock powering past the $97 share mark, after the recent pullback. The signing of a partnership similar to the Canopy’s deal is a catalyst that could push the stock above the $100 mark.
However given the high valuation and the fact that all underlying valuations are already priced in, it may be wise to maintain a cautious approach going forward. Shying away from the stock until another breathtaking catalyst comes into play is the best play, on the risk-reward front, taking into consideration that the stock is trading at 40 times expected 2019 revenue.
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Disclosure: We have no position in TLRY and have not been compensated for this article.