Pot Darling Tilray Reports With Focus on Sales: Cannabis Weekly

(Bloomberg) -- Tilray Inc., which reports its first full quarter of post-legalization results on Monday, has in many ways been the poster child for pot-stock mania.

Because it was the first (and only) cannabis company to do an initial public offering on a U.S. exchange, it became one of the most widely traded and volatile cannabis stocks during last fall’s run-up, gaining as much as 94 percent in a single day to a high of $300 in September. That gave it a market value of nearly $20 billion, on revenue of just $10 million.

Things have calmed down since then, with Tilray closing Friday at $72.50 and a market value of almost $7 billion. It’s still one of the most closely watched cannabis stocks, and investors will undoubtedly take a close look at its earnings when they’re released post-market.

Tilray probably only captured about 4 percent of Canada’s C$307 million ($230 million) legal cannabis market in the quarter, according to Eight Capital analyst Graeme Kreindler. That would be well below the estimated 30 percent market share of Canopy Growth Corp. and 20 percent at Aurora Cannabis Inc. The company is expected to report an adjusted loss per share of 13.5 cents on revenue of $15.9 million, according to consensus estimates compiled by Bloomberg.

Investors are paying for future growth of course, with revenue forecast to jump to $196 million this year and double again to almost $400 million in 2020, according to estimates compiled by Bloomberg.

Tilray has attracted some bears from the analyst community recently, including Jefferies analyst Owen Bennett. Bennett wrote earlier this month that it has “arguably inferior positioning in parts of its business” and it is a “struggle to justify the current valuation.”

‘Not Cool’

Democratic presidential candidate Beto O’Rourke is calling for the full legalization of cannabis in the U.S., but also wants to make it “not cool.”

Does the presence of a 76-year-old billionaire help make it a little more square? Not for investors, who backed Nelson Peltz’s decision to join Aurora Cannabis Inc. as a strategic adviser, sending the stock up 14 percent in New York following the announcement Wednesday, the biggest one-day gain since September. The chief executive officer and founding partner of Trian Fund Management will advise Aurora on potential partnerships and will receive 20 million stock options for his trouble, enough to make him the pot firm’s second-largest shareholder if he exercises them all.

“We would look for the company to make at least one partnership during 2019, although it may or may not involve an equity investment,” Cowen analyst Vivien Azer wrote in a note Friday.

Short selling

Investors may have loved Aurora’s Peltz partnership, but short sellers did too. Almost 2 million Aurora shares were shorted in the hours following the announcement, bringing the stock’s total short interest to 13 percent of the float, according to financial analytics firm S3 Partners.

The bet wasn’t immediately lucrative for those short sellers who jumped in after the Peltz announcement. According to S3, they lost $133 million Wednesday alone, bringing their year-to-date losses to $526 million.

It’s getting harder to short Tilray as there are hardly any shares available to borrow, S3 said. This is leading to borrowing fees as high as 110 percent and a slight decline in total short interest. It also means shorts “will not be a factor in Tilray’s stock price for the foreseeable future unless new lendable long inventory” hits the market, according to S3.

Weed Kings

Deal-making continues apace on both sides of the border. Harvest Health & Recreation Inc. is acquiring closely held Verano Holdings LLC for about $850 million in the largest U.S. pot deal to date. This puts the Phoenix-based company on track to become the biggest U.S. pot firm with estimated fiscal 2020 revenue of $670 million, according to Cormark Securities analyst Jesse Pytlak.

In Canada, Hexo Corp. reached an agreement to buy Newstrike Brands Ltd. for C$263 million. Although the purchase price pales in comparison to Harvest’s acquisition, the deal is notable for two reasons. First, it marks the first time Royal Bank of Canada has advised on a pot transaction. And second, Canadian rock band The Tragically Hip, a key adviser and investor at Newstrike, helped bring the deal together.

Several analysts are questioning Hexo’s guidance that the combined company will report net revenue in excess of C$400 million by fiscal 2020. That’s more than 70 percent above the consensus analyst estimate before Gatineau, Quebec-based Hexo announced the Newstrike acquisition, according to Bloomberg data.

Molson Deal

That guidance doesn’t include any contribution from Hexo’s joint venture with Molson Coors Brewing Co., which shows up on the bottom line but not as revenue, Chief Executive Officer Sebastien St-Louis said in an interview last week. He said he expects upside from that, as well as from Hexo’s partnership in Greece.

More deals could be coming down the pipeline after Canaccord Genuity formed a special purpose acquisition corporation, or SPAC, with the goal of acquiring a cannabis company with an enterprise value between C$100 million and C$1 billion.

Political Pot

It appears cannabis is becoming a vote grabber, even outside North America in traditionally conservative jurisdictions like Thailand and Israel. Israeli Prime Minister Benjamin Netanyahu said last week that he’s weighing legalization as polls show the new pro-pot Zehut party is gaining traction. In Thailand, which has already legalized medical marijuana, potential prime minister Anutin Charnvirakul is campaigning to legalize household cultivation of up to six cannabis plants.

In the U.S., New Jersey’s governor and top lawmakers have agreed on legislation to legalize recreational pot but it’s unclear whether they have enough votes to pass the bill. It’s looking even less certain that neighboring New York will legalize this year after Governor Andrew Cuomo said it’s unlikely to make it into the budget that must be passed by April 1. Height Securities now sees 25 percent odds that New York will pass a legalization bill this year, down from 55 percent.

Upcoming Events This Week

• Tilray Inc. will report fourth-quarter earnings after market on March 18 with an analyst call scheduled for 5 p.m. Toronto time
• Several cannabis companies will present at Roth Capital Partners’ annual conference in Laguna Niguel, California, including The Alkaline Water Co.. Australis Capital Inc. and Cresco Labs Inc. on March 17; and MediPharm Labs Corp., Acreage Holdings Inc., KushCo Holdings Inc. and Green Thumb Industries Inc. on March 19
• CannaGather will host an event March 19 in New York, featuring Weekend Unlimited Inc. CEO Paul Chu, Canadian Securities Exchange CEO Richard Carleton and 420 Investor founder Alan Brochstein
• Bloomberg Intelligence will host a cannabis outlook event March 20 that will address recent developments in the industry and highlight affected companies. Register for the webcast here
• Curaleaf Holdings Inc. will release fourth-quarter results after market on March 20 with an analyst call at 4:30 p.m. Toronto time

Our Top Stories of the Past Week

Billionaire Peltz Joins Aurora Cannabis as Strategic Adviser
Beto O’Rourke Says Time to Make Pot Legal and ‘Not Cool’ in U.S.
Harvest to Buy Verano for $850 Million in Largest U.S. Pot Deal
RBC Does First Pot Deal After Tragically Hip Brings It Together
Investors Hoping to Short Tilray Find ‘Cupboards Are Bare’
N.J. Leaders Agree on Pot Legalization. Now They Need the Votes
Netanyahu Dangles Weed for Tokers as Pro-Pot Party Polls High
Potential Thai Premier Touts Regulated Marijuana to Win Votes
Swiss Court Harshes Cannabis-Lovers’ Mellow With 25% Tax on Buds

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net, ;Courtney Dentch at cdentch1@bloomberg.net, Jacqueline Thorpe

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