Canada’s cannabis companies are experiencing a rush of investment that’s making even some participants paranoid.
“You might argue our valuations are a little bit ahead of our skis,” said Paul Rosen, chief executive officer of Tidal Royalty Corp., which finances weed companies.
Tilray Inc., a marijuana company valued at nearly $9 billion, currently trades at a price-to-sales ratio of about 124. That’s more than 25 times higher than Amazon Inc. and Apple Inc., the two most valuable companies in the S&P 500. And Canopy Growth Corp.’s $11 billion-plus market value is on par with Barrick Gold Corp.’s, even though the mining firm, with 18,000 workers, is expected to post 20 times the sales this year as the 1,000-employee cannabis company.
“It’s still not a grown-up sector by a lot of portfolio managers’ standards,” said Bruce Campbell, founder of StoneCastle Investment Management Inc., which is launching a cannabis-focused mutual fund. “The valuations are off the charts if you use any type of typical metrics, so that scares a lot of institutions.”
As Canada prepares to legalize marijuana on Oct. 17, the cannabis industry has soared from virtually nothing five years ago to one with global sweep today. Canadian companies, such as Canopy, Tilray, Aurora Cannabis Inc. and Aphria Inc., are leading the way. Global consumer spending on cannabis is expected to reach $32 billion by 2022, according to U.S. firms Arcview Market Research and BDS Analytics.
Jeff Sessions
Recreational use is now legal in nine U.S. states and the District of Columbia, and countries from the U.K. to Mexico are in the process of approving use of medical marijuana. But a lot of cannabis investing depends on the continued march toward legalization in the U.S., which is difficult to handicap given gridlock in Congress and Attorney General Jeff Sessions’s antipathy. Marijuana remains illegal federally in the U.S.
The latest investment frenzy really got rolling last month when Constellation Brands Inc., the maker of Corona beer, announced a $3.8 billion stake in Canopy. Since then, the BI Canada Cannabis Competitive Peers index has gained 45 percent. Large public companies and institutional investors had largely avoided the marijuana industry, fearful of running afoul of U.S. law. Constellation’s investment was seen as a validation.
The growth potential in marijuana has yet to translate into big sales or profits. Tilray reported second-quarter revenue of $9.7 million. Aurora, valued at about $6.4 billion, had sales of $12.2 million in its most recent quarter. In just the first two days of this week, Aurora stock has risen 12 percent and Tilray is up 23 percent. Tilray added another 7 percent in pre-market trading Wednesday to above $100 a share, a six-fold gain from its July IPO price of $17.
The market is expected to grow after legalization, but that still might not be enough to justify valuations.
Canada Base
“The investment narrative centers on their ability to use Canada as a home base from which they can expand internationally as the opportunity grows,” Andrew Kessner, analyst at U.S. brokerage William O’Neil & Co., wrote in a recent note.