Tilray earnings: Time to prove it can actually sell some pot

Investors will at long last understand how much legal marijuana Tilray Inc. can actually sell.

After Canada legalized pot Oct. 17, Tilray reported third-quarter earnings that included roughly two weeks of bulk shipments to provincial authorities — but Tilray said it hadn’t yet sold any recreational cannabis. Chief Executive Brendan Kennedy said in the November conference call that the fourth quarter would change that, so when the company reports earnings after the closing bell Monday, investors will finally learn how much of a change actually occurred.

Tilray TLRY, +0.68%  had a busy few months as 2018 drew to a close, buying Canadian licensed cannabis producer Natura Naturals for $26.3 million in cash and stock, which will likely double its domestic cultivation capacity. It also signed a distribution partnership with big pharma and a product development pact with big alcohol. Since the quarter ended, it has also acquired hemp foods maker Manitoba Harvest for $317 million in cash and stock.

Don’t miss: How marijuana companies can profit without selling pot

For Tilray to live up to its $6.69 billion valuation, it will need to show that it can sell just as much weed as its rivals, not just buy companies that make hemp products or grow cannabis themselves.

In a note to clients initiating coverage, Jefferies analyst Owen Bennett wrote that Tilray’s share of medical cannabis sales are not within the top four among its rivals and called its approach to recreational cannabis “not as well thought through” as its competitors. Bennett said rivals Aurora Cannabis Inc. ACB, -0.88%ACB, -0.83% and Canopy Growth Corp. CGC, -1.22%WEED, -1.27% are better-positioned to take advantage of Canada’s medical and recreational market.

For more: Jefferies analyst labels Cronos, Aurora the best bets to dominate cannabis sector

Bennett pointed to Tilray’s reliance on brands licensed from majority shareholder Privateer Holdings as a weakness and said the company appears to lag rivals in stocking recreational product on retail shelves. Bennett has the equivalent of a sell rating on Tilray with a $61 price target.

Earnings: Analysts polled by FactSet expect losses of 15 cents a share. The company was not yet public in the year-prior quarter and no data is available. In the third quarter, Tilray reported losses of 20 cents a share.

Estimize, a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others, expects losses of 14 cents a share.

Revenue: The analysts surveyed by FactSet expect Tilray to report revenue of $15.9 million and Estimize contributors expect revenue of $18.3 million. Tilray reported third-quarter sales of $10 million but said at the time it had not sold any recreational pot.

Stock movement: Since its initial public offering last July, Tilray stock has gained 227% through this week. During the same period, the benchmark S&P 500 index SPX, -0.09%  rose 5.7%.

Of the nine analysts who cover the company, three rate the company a buy, four have a hold rating and one rates Tilray a sell. The average price target is $105.67, which represents a 47% upside from Wednesday’s closing price of $71.80.

Tilray’s acquisition of Manitoba Harvest won’t start showing up until the company next posts results, but the acquisition is a significant one, as Manitoba Harvest currently makes more than Tilray from legal pot sales — 2018 sales were C$94 million ($70.5 million), while Tilray is projected to bank $43.1 million. Investors should listen for executives’ commentary on progress Tilray has made integrating the businesses and development of cannabidiol, or CBD, products.

In Canopy’s earnings several weeks ago, investors got a good look at pot pricing across Canada through the eyes of the world’s largest marijuana producer. In short, recreational pot was cheaper and medical cannabis cost more than expected, Piper Jaffray analyst Michael Lavery wrote. In a March note to clients, he said that he expects Manitoba Harvest to generate $80 million in full-year revenue and offset reduced revenue from lower recreational pot prices.

See also: Everything you need to know about CBD, the nonintoxicating cannabis elixir that isn’t fully legal — yet

Tilray signed a distribution deal with pharmaceutical giant Novartis AG NVS, +0.43% that expands upon a smaller one it had already signed. On the consumer side, it inked an agreement for a joint venture with Budweiser maker Anheuser-Busch InBev SA BUD, -1.34% to research tetrahydrocannabinol, or THC, and CBD beverages. All those deals will leave Kennedy with a lot to discuss on the earnings call.

Lavery wrote in a January note that the Novartis and AB InBev deals are two of the reasons Tilray is likely to be “one of several winners” in the sector. He also lauded its branding deal and CBD deal with Authentic Brands Group. Lavery has the equivalent of a buy rating on the stock with a $90 price target.

Bennett, the Jefferies analyst, believes the deals with pharma, big beverage and the branding deal are over-hyped for what Tilray is receiving in return. For example, Bennett is concerned that Anheuser-Busch’s joint venture will cause issues for in China, a country he says is very “anti-cannabis.” Bennett also cautions investors about the company’s extremely volatile stock, which is due in large part to the small float.

Read: How the unsteady rise of the pot industry has made dime bags a billion-dollar business

Investors should be wary of the level of short-seller interest in the name too. Roughly 20% of the company’s stock is currently being shorted, or about 3.78 million shares, according to data from analytics firm S3 Partners. The fees are high as well, with shorts paying 24.4% in borrow fees on existing short positions and between 45% and 110% on the tiny amount of stock available for new shorts.

According to its S-3, the short sellers will not be a factor in Tilray’s stock price for the foreseeable future unless more lending inventory becomes available.

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