September 21, 2018 / 5:37 PM / a month ago

Breakingviews - $100 bln weed company is still in the pipe

NEW YORK (Reuters Breakingviews) - Cannabis is making cryptocurrencies look lethargic. Share prices of listed producers have rocketed, in some cases faster than bitcoin did last year. Brendan Kennedy, the chief executive of Tilray, which made $21 million of revenue last year, believes his company could be worth $100 billion. He’s half right: a weed producer could get that big. The odds are against it being Tilray.

A worker tends to cannabis plants at a plantation near the northern Israeli city of Safed June 11, 2012. REUTERS/Baz Ratner

The Canadian company was worth $16 billion at Thursday’s close, around 10 times its initial public offering valuation in July. Tilray’s shares spiked 93 percent in intraday trading on Wednesday after it received government approval to supply cannabis extract for medical trials in the United States, where the drug remains federally illegal. They then fell sharply the next day. Cannabis stocks lend themselves to highly speculative trading because the market is still mostly theoretical – it’s technically illegal almost everywhere in North America except Canada, where it becomes legal for recreational use in October – and stocks aren’t very freely traded.

Despite that, the idea of a $100 billion weed company isn’t far-fetched. The global market for cannabis could be almost $230 billion within 15 years, according to brewer Constellation Brands, which owns a stake in producer Canopy Growth. Beer companies generally have valuations four times their revenue, so applying that principle to cannabis means a $100 billion enterprise value would need about one-tenth of that global market. Adjust for the time value of money, and such a company would be worth $24 billion today – around 50 percent more than Tilray was on Thursday.

It’s not impossible. Budweiser brewer Anheuser-Busch InBev, with a market value of over $150 billion, has around one-third of the global beer market. But assuming Tilray will be the Bud of marijuana is extremely risky. Other governments may not legalize cannabis at all. Those who do will create their own brands. And the bigger Tilray gets, the more of a target it becomes for U.S. authorities.

In one sense, bitcoin is a good comparison. The blockchain technology it runs on could change lives, but bitcoin, the currency, could easily fizzle. It’s not clear what the best, most economically viable application of blockchain will be, or who will own it. Ditto cannabis. Unlike bitcoin, Tilray has actual assets, so it’s not worth zero. But it has much to prove before it merits the twelve-digit crown.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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