This Big Money Deal Won’t Do Much for TLRY Stock
Canadian cannabis company Tilray (NASDAQ:TLRY) finally scored the big money deal that investors were waiting for. Global beverage giant and the world’s largest beer maker, AB InBev (NYSE:BUD), is partnering with Tilray to research cannabis infused drinks. Tilray stock price initially popped as much as 20% on the news. But, it’s given up most of those gains, and as of this writing, TLRY stock is up just 10%.
Why? Because while Tilray got the big money deal investors were looking for, that big money deal lacks the pop that everyone was expecting.
Specifically, cannabis peers Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON) scored multi-billion dollar investments from beverage and tobacco giants. In contrast, AB InBev is pumping just $50 million into a joint research venture with Tilray.
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As such, while the deal is promising and could lay the groundwork for a brighter future, it isn’t the exact catalyst TLRY stock needed to bounce out of its recent sell-off.
Since the legalization of cannabis throughout Canada, TLRY stock has lost about half of its value. Yet, the stock is still being valued at a big premium to each of the “Big 5” Canadian cannabis companies outside of Canopy Growth.
Canopy has a $4 billion investment from Constellation Brands (NYSE:STZ) lined up. Tilray’s valuation made sense only if it, too, had a multi-billion dollar investment lined up.
Alas, it doesn’t, and that’s a problem for the stock.
The AB InBev Deal Is Underwhelming
Broadly speaking, a big money deal is exactly the catalyst TLRY stock needed to bounce it of its recent slump, but, the AB InBev deal is underwhelming. It simply isn’t enough to get this stock back to $100.
Most investors were hoping Tilray would score a multi-billion dollar investment from a beverage or tobacco giant, much like Canopy and Cronos did. As such, the one catalyst that that could’ve pushed TLRY stock back to $100 would’ve been a multi-billion dollar investment from AB InBev.
Instead, AB InBev is pouring a measly $50 million into a joint research venture with Tilray.
This is promising. AB InBev is the world’s largest beer maker. If the research progresses well, then Tilray is on track to have a head-and-shoulders lead in the cannabis beverage market.
Some project this market to be as big as $600 million one day in the U.S. alone, implying a several billion dollar market globally. Tilray is getting a head start in this market, and that’s a positive development.
But, the deal is also underwhelming. A $50 million commitment from AB InBev (a $130 billion company) is a drop in the ocean. The language in the press release also doesn’t imply that AB InBev and Tilray will be “lifetime partners,” and that stands in stark contrast to the bullish language in the Cronos and Canopy deal press releases.
Overall, Tilray’s deal with AB InBev is a positive development, but not the catalyst TLRY needed to rebound back to $100. With this big money catalyst now in the rear-view mirror, the near term outlook for Tilray stock isn’t that great.
Long Term Is Promising, but Clouded by Near Term Noise
The long term growth potential for pot stocks is exceptionally promising considering the huge global addressable market for recreational and medicinal cannabis, as well as the progress being made towards legalization. That is why big money is moving into the space, and it’s also why current multi-billion dollar valuations are warranted in the long run.
With a deal from AB InBev in its pocket, Tilray’s likelihood of being a pot stock winner has gone up. But, the valuation already reflects this.
With a $7 billion market cap, Tilray is far bigger and more expensive than Aurora (NYSE:ACB), Aphria (NYSE:APHA), and Cronos. It is also only slightly behind Canopy. Thus, there isn’t much room for valuation expansion here and now.
Plus, the whole market is reeling from the Fed playing Grinch this holiday season. So long as broader markets are reeling on concerns related to growth next year, richly valued pot stocks will struggle, too.
Also, supply shortage issues throughout Canada aren’t improving. So long as those issues remain a problem, Tilray’s numbers will be lower than expected, and TLRY will struggle to justify its valuation.
As such, the near term outlook for TLRY isn’t all that great right now. The big catalyst that was supposed to save the day arrived, and it was underwhelming.
Now, the stock is operating against multiple negative backdrops, include a financial market obsessed with a looming recession and a cannabis market plagued with supply shortages.
Add it all up, and it doesn’t equal TLRY heading higher.
Bottom Line on TLRY Stock
While the long term outlook for TLRY stock is promising, the near term outlook is less than stellar, and investors shouldn’t expect much of a sustainable rally any time soon.
As of this writing, Luke Lango was long CGC.
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