Explaining Tilray's price advance in a quiet cannabis stock market

Tilray Inc. (NASDAQ: TLRY) went public on the U.S. NASDAQ exchange last week making it the first “pure” cannabis company to do its initial public offering in the U.S. (see one of many articles here) (All figures in U.S. dollars) Tilray, a Canadian licensed producer, is owned by private equity firm, Privateer Holdings. Last week TLRY raised $153 million on its Initial Public Offering (IPO) at $17 per share, well above the $14 to $16 price that was generally expected. The stock exploded after the opening bell and closed Thursday +31.7% at $22.39 per share and advanced a further 33.0% to close at $29.77 per share on Friday. This meant investors were valuing the company at a market cap of $2.7 billion behind only Canopy Growth (NYSE: CGC) and Aurora Cannabis (TSX: ACB).

What explains this staggering price advance in an otherwise quiet cannabis stock market?

It probably wasn’t its profit picture. TLRY, like most large LPs is still operating in the red. It’s likely not the fact that it’s a low-cost producer. At around $3 per gram, it is one of the higher cost growers among the industry leaders. Finally, it isn’t the simple share structure. Investors generally hate companies with Class 1 and Class 2 shares where the controlling entity Privateer gets three votes for every one that arm’s length shareholders have.

No, we think the main reason is that of the 90 million shares TLRY has issued including the recent IPO, about 81 million are owned by Privateer Holdings and 10 hedge funds that aren’t allowed to sell for six months. That means only the 9 million shares issued in the IPO are available for trading. So some enthusiastic buyers that CEO Brendan Kennedy was able to drum up on a road show featuring hundreds of meetings in 15 cities on four continents are chasing those very few shares available for trading. We think there will be a clearer picture of the true value of TLRY around Christmas when the remaining 90% of the shares become free trading.