The Tilray stock has been extremely volatile last few days because of the small number of shares available for trading.
Tilray had its US-based IPO on NASDAQ just three months ago, at a price of $17 USD per share which was at that time one of the highest in the Canadian market.
Meanwhile, several other companies made huge plays and the value of their stock rose in the meantime as well, but none did as well in the past three months as Tilray.
In a market worth which is starting to look like more than $8 billion CAD yearly, Tilray was valued at just $1.4 billion right before it’s IPO.
Just a few weeks later, the company started making intense growth doubling by mid-August, which should have been indicative in itself of what was about to follow.
Around the same time Canopy Growth received a huge investment, $4 billion from Constellation Brands which did this to increase their position in Canopy Growth to 38%.
Even Coca-Cola was rumored to be cooking some type of a joint venture with Aurora, but that ultimately turned out to be only half true as no deal has been even mentioned, although they did talk about the possibility of CBD-infused drinks.
However, neither of these two made the whole industry ask themselves: “What in the world is going on with this stock,”, and here’s why.
Why is the Tilray stock so volatile?
The second half of August is when the Tilray stock started becoming extremely expensive, and somewhat more volatile, as the price was steadily rising.
Tilray ended August trading at $65.20 USD, nearly four times as much as what they initially put on their NASDAQ application form.
But that wasn’t the end for the astronomic rise of this stock, not even by a long shot.
As you may know, Tilray already had some very valuable deals on the table, one of which was made way back in March of this year.
We’re talking about the Novartis deal, of course, in which Tilray promised to supply the Swiss drug producer, in order to create a substitute for opioid-based prescription drugs.
“Cannabis is a substitute for prescription painkillers, prescription opioids, and so if you’re an investor in a pharmaceutical company, or you’re a pharmaceutical company, you have to hedge the offset from cannabis substitution,” said Tilray CEO.
By September 5th, the Tilray stock climbed all the way up to $90 USD, went to $77 two days later, and then started the yet unseen meteoric rise for a weed stock.
Just a few days ago, the company got approval from the US DEA to import cannabis capsules containing two different cannabinoids.
In the last five days, it’s been extremely volatile, trading at various prices from $110 USD to just under $300 on Wednesday 19th, at which point it reached 800% of its initial IPO value.
Tilray’s market cap was at one point larger than that of Best Buy, an electronics retailer with over $43 billion in sales.
Tilray (a cannabis company w/ $28 million in sales) now has a larger market cap than Best Buy (an electronics retailer w/ $43 billion in sales). pic.twitter.com/6TfoEB1iQ0
— Charlie Bilello (@charliebilello) September 19, 2018
So, why is this happening? Is this a pump and dump scheme like many other that happened in many markets across the globe?
Or is it perhaps a good calculation on the side of the Tilray execs and their investors as well?
Tilray has an extremely small float
If you aren’t familiar with investment terms, float is the number of shares a company has available for trading. It is calculated by subtracting closely held shares from the total shares outstanding.
Now, Tilray is known for not having a very big float, in fact, it has one of the smallest in the industry at this moment.
It has only 17.8 million shares available for trading, which is nothing compared to the likes of its peers:
- Cronos Group Inc. float: 196 million shares
- Canopy Growth float : 202.28 million shares
- Aurora Cannabis float: 912 million shares
As you can see, these companies had a different approach to corporate finance, and it’s starting to look like Tilray’s plans were the most efficient.
At the same time, the unusual amount of trading is helping to push the demand for these limited amounts of Tilray shares, which is why we are seeing rapid growth in share price.
However, this isn’t going to last forever, as the company’s lockup date is about to expire in a few months.
At that point, Privateer Holdings, which is held by Peter Thiel, will probably want to cash in on their earlier investment when they bought 76% of Tilray and received 75 million shares at $1/share.
Once these shares get onto the market, it is very likely that the stock will be somewhat diluted and might drop down.
Thiel became the first institutional investor to invest in the cannabis market when he funded Tilray’s Series B financing round in December 2014.
So, the combination of a small float and an extremely high demand for Tilray shares is what makes the stock go through the roof.
On the other hand, we have short-sellers and chicken little’s all over the place screaming it’s a bubble, which is why the stock is as volatile.
One thing is certain, if you bought some shares of the Tilray stock after it’s July IPO, you are probably rubbing your hands on your way to the bank right now.