Marijuana stocks rattled on Wednesday as increased fears of a bubble spread throughout the sector, led once again by famed short seller Citron Research and its boisterous Head of Research Andrew Left. Left followed up his recent takedown of Cronos Group Inc. (NASDAQ:CRON) (TSX:CRON) with an all-out attack on US stock darling Tilray (NASDAQ:TLRY) on Wednesday, stating in his latest report that, “[t]he bubble has created this ridiculous valuation discrepancy for Tilray.”
A final word on Tilray
The report, “Our Final Word on $TLRY before $50” did little to stop the company’s momentum, with Tilray up nearly 10 percent by the close of trading on Wednesday, ending the day at $104.95 per share. Still, while it’s well-known that Left’s intentions are rarely pure, and his winning predictions even rarer, his assessment of the market this time may ring with a modicum of truth. It is quite possible for some to be right, even if it is for the wrong reasons.
“Lastly, over the past week Citron has received hundreds of emails from investors ranging from anti‐Semitic to threats on family, but NOT one of them could justify the price increases with any analysis whatsoever,” wrote Left in his assessment. “We have been publishing for 17 years and this is generally a sign of a retail bubble.”
“The bubble has created this ridiculous valuation discrepancy for Tilray,” he continued.
An overvalued, three-legged unicorn
According to their most recent financials, Tilray is losing $12.8 million per quarter on $9.7 million of revenue. That means the company is trading at over 150 times what they earn. It may be all well and good, as the cannabis industry is built on sky-high valuations in anticipation of the opening of Canada’s recreational cannabis market on October 17, but Tilray’s problems are twofold.
First, the company, again like most in the industry, is completely diluting its shares through stock awards while at the same time, as Left notes, relying on third-party suppliers to meet demand. It’s a commodity business with no commodity —and no money to boot. Meanwhile, as has been pointed out in several analyses of the stock, their CEO Brendan Kennedy is pumping the stock with vapid quotes clearly meant to scare FOMO investors into action.
“Once in your lifetime, if you're lucky, you see an entire industry emerge from scratch, seemingly overnight — and that's what we're seeing here,” he told CNBC recently.
Right now Tilray, along with Cronos and Canopy Growth (NYSE:CGC) are American investors only decent options in the marijuana stock market, which at least in the case of Tilray, makes it seem more valuable than it truly is.
A bubble is on the horizon
But as Left notes in his report, Tilray is just a symptom of a much larger disease plaguing investors right now. “These stock prices are equivalent to bitcoin mania – although it is even more ridiculous than bitcoin,” writes Left.
While some so-called experts insist that the current market rally is here to stay, the truth may be less straightforward than that. After all, the current market rally began after Constellation Brands made their big reinvestment into Canopy Growth last month, fueling speculation that the next big deal would be just around the corner. Meanwhile, in the states, excitement swirls every time a new bill is introduced into Congress as investors enjoy some wide-eyed expectation that the federal prohibition on cannabis will finally come to an end. And yet, all it takes is for some Senior White House official to swipe paperwork off the President’s desk for him to forget to sign it while a secret cabal of anti-pot crusaders holds secret Skull and Bones meetings to try and end the legal weed industry.
The point is, the current market rally for marijuana stocks is fragile, built not just on speculation, but on hopes and dreams. All investors need do is look at the failures of California to see that Canada’s legal market won’t push their portfolio’s over the top.
This in itself may all be speculation, and hopefully so. But right now all signs point to a marijuana stock bubble about to burst. And Tilray may be where it pops.