The Promise

Some cannabis investors may remember Namaste’s “The Pledge”, where management agreed not to sell shares for 90 days and invited any individual investor who agreed to do the same to a party at the end of the period.

Well on January 11th, Tilray took a page out of Namaste’s book with their own weaker version of “The Pledge”.

Tilray’s private equity owner, Privateer Holdings, put out a press release saying they have no plans to “register, sell or distribute” their 75mm shares, representing 88% of Tilray shares outstanding.

The stock spiked 25% after the release and has not seen the valuation led crash that many investors were calling for.

Well That Didn’t Last Long

Fast forward to less than two weeks later and only a week after the lockup expiration and we see a form 4 filed with the SEC showing Tilray CEO Brendan Kennedy sold 149,916 shares for $11 million, 38% of the stock he currently owns.

You may be thinking, “Yes he sold but it was Privateer not Kennedy who loosely committed to holding its shares”.

We would argue that Brendan Kennedy is effectively Privateer.

Kennedy is the Executive Chairman of Privateer and has a seat on the board along with his duties as the CEO and a board member of Tilray.

Kennedy is also one of the three founders of Privateer and according to filings he and his three co-founders collectively own 45% of the firm.

The founder, executive chairman and board member of Privateer selling shares has the same optics in our book as Privateer the corporate entity selling shares only 2 weeks after promising investors it would not do so for months.

Insider’s Gains are Shareholders Losses

This looks like a typical situation of insiders taking advantage of shareholders trust to enrich themselves.

Insiders agreed publicly on a corporate level not to liquidate their shares for a few months, artificially holding up the share price and telling the market they believe shares are at worst fairly valued.

Investors rush in to buy the stock after reading the press release, supporting the share price even as the stock looks grossly overvalued on any metric.

Using Tilray’s long term capacity and a revenue expectation of $7 per gram, we don’t see a stock worth more than $40 per share, 50% downside from the current share price.

At the same time, these insiders are liquidating their personal holdings for much higher prices than they would have realized had the pledge from Pioneer not been made.

Tilray is the most overvalued cannabis stock in the industry, trading at over 40x enterprise value to EBITDA, a measure of cashflow, compared to a group average of only 16x.

Using Tilray’s long term capacity of 208,000 kg, which includes Natura Naturals and a revenue expectation of $7 per gram, we don’t see a stock worth more than $40 per share, 50% downside from the current share price.

FORECAST EV/EBITDA in 2020

Source: Grizzle Estimates, SEDAR

Actions Speak Louder Than Words

Management is making it clear they don’t believe Tilray is worth $80+ a share.

If they did why would they be selling a substantial block of shares so soon after a company they control committing to an informal lockup of its holdings.

To be a smart investor you need to pay close attention to the signals management is giving you and act on them.

To be a smart investor you need to pay close attention to the signals management is giving you and act on them. 

A management team selling shares into a retail investor-driven stock spike of their own making tells you they have no belief that the stock price can hold $80/sh or higher longer term

Investors should expect Tilray to sell off in the months to come, whether driven by fundamentals or insider selling until it reaches some form of fundamental valuation support around $40/sh.

 

In the interest of full disclosure, employees of Grizzle are short shares of Tilray. See the Content Disclosure section here on our Terms and Conditions page for more details.