Is Tilray an overvalued marijuana stock, or is there room for growth?

Earnings report season proved disappointing for most major cannabis companies, with Cronos Group being one of the few bright spots. For such a talked-about stock, Tilray, in particular, put up unimpressive financial results, with the company reporting last week that they missed earnings estimates for the second time in for the third quarter and nine months that ended September 30, 2018.

Following the after-hours earnings announcement Tuesday, Tilray stock opened down Wednesday to $105.56 from the previous day’s $111.17 close, a 5 percent decline. The stock continued inching down Wednesday to $102.34 at close, which resulted in a total decline from prior days’ close of around 8 percent.

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Since then, the stock has made somewhat of a comeback with the returns in the last five trading sessions remaining relatively flat.

“The cannabis industry remains very robust and we are pleased with our revenue momentum and strategic achievements in the third quarter,” said Brendan Kennedy, President and Chief Executive Officer of Tilray in a statement. “We are in the early stages of achieving our growth potential and our team continues to strategically execute on disciplined operational initiatives and investments to support Tilray’s long-term, sustainable growth as the pace of legalization continues to accelerate around the world.”

“Going forward, the demand for our products is strong and we remain committed to expanding our leadership in the global medical and adult-use cannabis markets,” he continued.

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Tilray is overvalued, but analysts continue to consider it a buy

Tilray made history when it became the first marijuana stock IPO on a United States exchange. While shares took investors on a rollercoaster ride all summer and into the fall, ranging from the $17 IPO price to $300 momentarily back in September, there continues to be evidence that Tilray is not worth the current $10.291 billion that the stock’s market capitalization suggests.

Tilray continues to become progressively more unprofitable, reporting a net loss ten times greater in the third quarter of 2018 than the company saw during the same period the previous year — $1.8 million in 2017 and down .02 earnings per share compared to $18.7 million in 2018 and down .20 EPS.

Despite declining profitability seen in these earnings results, some analysts remain optimistic and still consider the stock to be still worth buying. For example, Analyst Vivien Azer at Cowen assigned an “Outperform” rating to the stock.

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"We have an Outperform rating on TLRY. We believe that access to strong and established U.S. brands, proprietary consumer insights data sets, as well as early success in securing provincial supply agreements position TLRY to capitalize in the industry's robust growth," wrote Azer.

Cowen also reported that they expect the total medical and recreational marijuana market in Canada to reach $12 billion by 2025. They note that this estimate does not include international revenue, which Tilray is already taking advantage of and therefore puts them in a strong position as a significant global player.

Nonetheless, the Cowen analysts are remaining pragmatic with Tilray’s condition from their reported fundamentals and adjusted the company's price target to $150 a share from $172. They also lowered fiscal 2018 revenue estimates to $39.9 million from $41.6 million and significantly cut the company’s fiscal 2019 estimate to $119.5 million from $145 million.

Tilray, Inc. Reports Third Quarter 2018 Earnings https://t.co/jY15yf1Pfy

— Tilray Canada (@tilray) November 13, 2018

 

Tilray management continues to be optimistic

Kennedy’s statement about being in the “early stages” of growth could have been alluding to why Tilray is experiencing larger losses and defending the circumstances. However, it is common for early-stage growth companies to take on losses before optimizing operational costs and increasing revenues from investments, so the rise in net losses in the third quarter might not be something to be concerned about yet.

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After all, there are plenty of factors working in Tilray’s favor, including the stock price’s sensitivity to investor sentiment at a time when there is plenty of positive regulatory shifts in North America for the marijuana industry. For example, Tilray skyrocketed up 30 percent on November 7 when Attorney General Jeff Sessions, one of the cannabis industry’s biggest enemies, left office.

Of course, the possibility of more regulatory easing in the United States would also improve investor sentiment and send Tilray flying higher.

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