Take a Look at Valuations before Jumping into Cannabis Stocks

Cannabis stocks

Cannabis stocks (HMMJ) have soared in recent weeks in anticipation of October 17, the date when recreational cannabis sales are slated to begin in Canada. Some of the stocks have grown exponentially, challenging the rationality of such movement. For example, Tilray (TLRY) has soared over 1,000% as of September 19 since its IPO (initial public offer) date in July 2018.

In our series, Tilray Soars ~60% on September 19—What Drove the Stock Up, we concluded that the valuations looked stretched. We’ll go into more detail in this series with a discussion of valuation multiples for the cannabis sector as a whole.

Take a Look at Valuations before Jumping into Cannabis Stocks

EV-to-sales

In the chart above, the yellow line shows the EV-to-sales (enterprise value to sales) median for pure-play Canadian cannabis companies, while the blue line shows the EV-to-sales median for a mix of Canadian and US pharmaceutical companies with exposure to cannabinoid drugs. We use EV-to-sales because most cannabis companies may not see positive earnings in the near future, which makes a side-by-side comparison difficult. Also, sales can never be negative.

The overall median for Canadian cannabis companies (yellow line) has risen recently to 12.7x as of September 19. We have taken a median instead of a simple average in order to soften the impact of outliers such as Tilray. The EV-to-sales of the Canadian cannabis companies has been at an average of 7.8x from January 2017 until September 2018. Thus, the current valuation level of cannabis companies as a whole looks stretched.

Next, we will compare EV-to-sales of individual cannabis companies such as Tilray, Canopy Growth (WEED), and Aurora Cannabis (ACB) (ACBFF).