With the unbelievable run-up in prices for both Canopy Growth Corp. (NYSE:CGC) and Tilray Inc. (Nasdaq:TLRY) in recent months, it’s a good time to compare the two companies to put the weed stocks in perspective.
These two companies couldn’t be more different. On paper, they’re both Canadian weed stocks that are on the verge of something big. Some estimates suggest that the global pot market could be worth $220B by the year 2030. In anticipation, investors seem to have pushed the valuations of everything that remotely smells like ganja to prices that would make Satoshi Nakamoto blush.
Nevertheless, if you dig just an inch deeper, you’ll discover that Tilray and Canopy are not in the same position. One of them is clearly a better bet.
At current market prices, both Tilray and Canopy trade at more than 100x their annual revenue. Just to clarify, that’s revenue, not profits, because they both make a loss. But here’s the thing, Canopy’s stock price is 144x sales, which is crazy enough, while Tilray trades at a mind boggling 576x sales.
If you truly believe weed is the next alcohol or big tobacco, the average price-to-sales in those industries hovers around 5x. Which means Tilray would have to grow sales 100 times over the next few years as weed gradually becomes legal in more parts of the world to reach a mature valuation. In the trailing twelve months, it has earned just over $28 million in sales.
What does Tilray have to power that growth to billions in revenue? Not much. The company has about $25.3M in cash, $65M in property, and nearly $71.2M in total liabilities (including $37m in debt facilities from owner Privateer Holdings).
Compare that to Canopy Growth’s more than $4B in firepower from Constellation’s (NYSE:STZ) recent investment, 500,000 square feet of GMP-certified production space, Tweed brand partnership with Snoop Dogg, and operations in more than 11 countries. You can clearly see why Canopy is the gold standard in the global weed market. Although it’s too early to pick a winner yet, I’d be more willing to pour money into a company with owned operations in five continents, permissions to open retail stores in various Canadian states, and access to the distribution network and resources of one of the world’s largest beer companies.
Canopy is clearly the larger player in this sector with higher chances to grow, yet Tilray trades at a market cap at least 60% higher. Here’s a table for context:
|Cash||$4.5B (including STZ investment)||$23M|
|Property & Equipment||$317M||$45M|
|Brands||Tweed / Hiku / Spectrum||—|
|Production Capacity||665,000 sq ft||40,000 sq ft (to be completed in 2018)|
|Controlling partner||Constellation Brands ($33B beverage giant)||Privateer Holdings (VC)|
(These figures obviously move around a lot so might be outdated by the time the article is published.)
Look beyond the headlines and you’ll notice that the hype surrounding weed stocks is just hitting fever pitch. The market isn’t just pricing growth to perfection here, it’s pricing in dominance for ALL weed stocks RIGHT NOW. That’s physically impossible.
Now Tilray has managed to surpass Canopy’s insane valuation with nothing more than one and half production facilities, low cash, high debt, no agreements with provinces in Canada, and no recognizable consumer brand. This is probably the most overvalued stock in North America right now.
With this in mind, I think reasonable investors should wait for prices to fall and for the market to regain its senses. If you’re worried you’ve missed the boat, don’t be… Full story at Seeking Alpha