Tilray’s gains are too insane not to write about, and today we watched it gain in an hour mid-day, a crazy $12 a share.

I should have listened to my dad telling me at $32 to buy this, but as a fundamental investor, it just didn’t warrant it than, and not now either in my mind, up over 300% in a month since IPO. In terms of market cap, it is 3rd largest behind Canopy and Aurora, and ahead of the likes of Aphria, Canntrust, and Hexo, all who have more in Canadian supply deals than Tilray currently.

Let’s start off with some positives on Tilray, one being that they are lead by Brandon Kennedy and a solid management team, that has executed very well and continues to. Management is one of the most important things in this industry and any industry for that matter, and Tilray’s has executed well so far. Another is their International plans, which seem to be up there with the likes of Aphria, Aurora, and Canopy. Tilray has plans to ship to Oceana, Europe, and South America, with production facilities in Canada and in Portugal. The Portugal facility will primarily serve the growing European market. Another large positive has been the partnership with Sandoz, a division of Novartis which gives instant credibly to their business, especially the medical side. The final reason for this run for Tilray is the visibility on Wall Street, acting as the preferred way to play the cannabis industry for American investors because of its primary listing on the Nasdaq.

Now for why we are so bearish on Tilray. They are trading at an insane projected EV/EBITDA multiple for 2019 that is already 3x one of the most expensive in the industry, Canopy Growth’s projected multiple. Canopy has a $4 Billion USD war chest, and backing by a giant in Constellations Brand. Canopy also has by far the largest amounts of supply deals in Canada, and most moving parts Internationally. Tilray is depending on a lot of their future revenues to come from International markets, with limited supply deals in Canada, with only around 7000 kgs negotiated so far. It is true this will grow with the rest of the provinces still under negotiations however. Many of the largest players have already secured large amounts in these provinces under negotiations, for example, Canopy with over 30 000 kgs in Alberta allocated, meaning there may not be room for large orders for the likes of Tilray.

Next is Tilray’s balance sheet which is one of the worst in the pristine balance sheet industry of pot. With current liabilities exceeding current assets by a large amount, and very limited cash on the balance sheet compared to peers (25 million) this is lagging industry peers. For such a new industry with lots of challenges, we would like to see a cleaner balance sheet to maneuver through and grow through the years, especially should they continue this aggressive buildout.

Next about Tilray is their ability to whether margin pressure compared to our favourite in the space, Aphria. Cost of goods sold is very high, at 4.78/ gram last quarter, which is significantly higher than the likes of Aphria and Canntrust. As oversupply and competition issues occur over time, the ability to produce cheaply will be one of the most important tools to gaining/ protecting market share, and Tilray is very far behind in this one. Their way to combat this potential margin pressure is high R&D spending, to compete in the value added space. Only thing is all their competitors are also spending big here, for example Aphria’s $55 million centre of excellence which will be state of the art, showing the competition in the R&D space.

Next, one thing we don’t like is the share structure. Although good to have financing available through Privateer Holdings, Privateer holds a majority of the shares and effectively has control of decisions at all points, with 82% ownership. The IPO primarily was responsible to pay back loans from Privateer, and didn’t go to helping the company grow at all, rather little brother repaying big bro. Although a long way away, it’s important to think what is going to happen after the 6 month lockup period is done, in 5 months. You would be somewhat crazy to not think Privateer wouldn’t be large sellers should there still be gains this large on the board still. Privateer is an investment firm and any firm with an investment valued this large would be interested in selling some shares at least. The small capital structure out now makes these strong push ups in share price possible, and should face pressure once the lockout period is done.

We commend all those who have stuck with this thing since IPO and in the $30’s, but $90 a share is way too high to pay for a company with its fair share of challenges. For articles on our favorites, click the links below!

Canntrust- A company you Cann-Trust
Maricann- Is the worst behind them?
Hydropothecary- Quebec’s finest
Constellation Brands- Safe entry into Marijuana?
Aphria- the ebitda king