Cannabis producer Tilray Inc. (NASDAQ:TLRY) has been the hottest stock this summer. The shares are on a roll again, jumping 14.7 percent in the pre-market session on Thursday morning, after the company announced it had struck a partnership with Budweiser maker Anheuser-Busch InBev (NYSE:BUD) to explore the production of non-alcoholic drinks containing CBD and THC.
That’s going to be 50-50 partnership with each company investing up to $50 million in the JV with potential commercialization of the products confined to Canada. No more details were disclosed, though CBD can be incorporated in a wide variety of products ranging from essential oils and fruity tea-like beverages to bath bombs and pain creams.
The announcement comes just a day after Tilray said it had entered a deal with a subsidiary of Swiss drug giant Novartis AG to distribute its medical-cannabis products worldwide. Tilray made history this year after becoming the first ever pure-play marijuana company to be listed on a major U.S. exchange. TLRY shares have racked up impressive gains of 318 percent since its July IPO.
Cannabis-Infused Beverages
(Click to enlarge)
Source: Tilray Investor Presentation
Source: Tilray 8-K Nov. 13, 2018
Investors have become enamored by the company due to the ambitious growth trajectory it has set out for itself. Tilray has set up operations in 29 countries and has managed to establish an impressive distribution network for its products, claiming to sell in 12 countries and targeting many more as a wave of legalization continues to sweep across the globe.
The company eventually sees itself becoming a leading player in the $150B medical-cannabis market—a lofty goal given the company’s modest revenue of $27.6 million for the first nine months of the year.
One of the key markets the company has trained its eyes on is cannabis-infused beverages.
Speaking on CNBC’s Power Lunch shortly after the IPO, Tilray President and CEO Brendan Kennedy said the company foresees a future where marijuana produced for smoking will only constitute 10 percent of consumption with all other products taking up 90 percent. According to Kennedy, consumers in the future will order cannabis as a beverage in a bar instead of alcohol. Related: Tesla Cuts Prices As China Suspends Auto Tariffs
Kennedy’s bold claim might sound a little over the top. Yet, it might actually be founded on facts. Smoking currently accounts for only 40 percent of cannabis consumption compared to 90 percent eight years ago. Further, there’s evidence that people are drinking less and preferring to light up or consume other forms of marijuana.
A joint study by two universities found that overall alcohol consumption dropped as much as 15 percent in states where medical marijuana laws had been enacted, leading to the inevitable conclusion that increased marijuana consumption was indeed taking a bite out of alcohol sales. Further, claims that nobody ever dies from marijuana overdose compared to tens of thousands that die in a typical year from alcohol-induced causes can act as a powerful marketing message for the medical marijuana industry.
Battle Ground Stock
While Tilray’s bright future could be one reason that explains the tremendous gains, there’s another less obvious one—short squeezes.
Tilray has become a battleground stock, attracting both longs and shorts with each seeing a different side of the coin. While the longs love the growth opportunities, the shorts love Tilray because they see its sky-high valuation as a good shorting opportunity. Unfortunately, this has been mostly working against them because of several reasons:
- Low float-- TLRY has 16.7 million of common shares outstanding and another 76.5 million locked up since its IPO
- Shares are hard to borrow—Tilray’s available float is so low that shorts often struggle to get their desired numbers from their brokers. This huge demand drives prices up
- High costs of financing a short position-- the cost of financing a TLRY short position is an incredible 370 percent, meaning it costs $262.7 to borrow one Tilray share for one year at the current price of $71. That’s more than 200x more expensive that what it costs to borrow a single Tesla Inc. (NASDAQ:TSLA) share
- The constant buzz surrounding the company that tends to excite investors
For intrepid shorts or investors looking to build a long-term position, the stock’s January 15, 2019, lock-up expiration date might be a good target/entry point.
By Alex Kimani for Safehaven.com
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