Remember around Christmastime when Bitcoin pushed towards a price of over $19,300 for a single Bitcoin? It was an absurd bubble in that Bitcoin has no intrinsic value, and some order has been restored as the price has come down to $6,300. Eventually, it will all wither away.
But in the meantime, marijuana/pot stocks appear eager to pick up where Bitcoin left off. In particular, it has come to my attention that Tilray (TLRY), a medical marijuana production firm with $20 million in revenues, and somewhere between $200,000 and $3 million in net profits, has increased from $35 per share to $214 per share for a valuation of around $20 billion.
Needless to say, this business is horribly, offensively overvalued and anyone who buys the stock at this price point is engaging in the greater fool theory in which they are fully relying upon some other patsy to come along next in line and pay a higher price. This is implied because, if you take the stock up on its own merits and analyze it as a business trading at $20 billion against a few million in profits, we are talking about a valuation of 6,667x earnings. The majority of businesses trading at a valuation over $20 billion earn at least $1 billion per year in net profits. Tilray’s revenues are 50x smaller than the profits of the typical firm of this valuation. That mismatch brings us into the carnival of the absurd.
Right now, Tilray’s market is highly illiquid, with only approximately 18 million shares available as float out of the 77 million or so in existence (over 75% of the company is owned by Privateer, a fund in which billionaire Peter Thiel has an undisclosed amount). Further, executives, insiders, and others are subject to a “lock-up” period in which they are barred from selling their Tilray stock for 180 days effective from the July 2018 IPO, further constraining its available market of purchasers.
This means there is an almost non-existent market for those who wish to short the stock, and for those who wish to buy the stock, there is this same non-existent market that greatly exceeds the demand and makes it easy to push up the price. You have to remember–the price of a stock is only the value of the highest last price that someone paid for a slice of ownership. If someone calls up a Tilray owner and says he’s willing to pay $300 per share for 500 shares of the stock, the stock price will rise accordingly based on that transaction. Normally, markets are so liquid that we are shielded from observing this One Great Fool theory, but when the liquidity/float for a stock is small enough, we can see it occur out in the wild.
We could put this another way. Right now, rational actors, who know that a stock trading at a valuation of 6,667x earnings is absurd, are prevented from participating in this market, while those who are irrationally exuberant and driving up the price of the stock are the ones with the access to it.
Of course, this will not last forever. At some point, even the greedy sense their limits and want to get out. At some point, float increases and short sellers bring sobriety to the worst market excesses. At some some point, an adverse business development occurs and people regain their senses and realize that valuing a $20 million revenue generator at $20 billion is absurd for the same reason that valuing Bitcoin at $19,300 is absurd. My skill is not at defining when the “at some point” will occur, but rather, at passing along the message that he who purchases a stock at a 0.014% earnings yield will have their capital impaired for a while at best, destroyed at worst.
Originally posted 2018-09-20 01:20:08.