Meet Tilray, the $15 billion cannabis king with scant revenue

Two months ago, Tilray Inc. was a little-known Canadian marijuana producer working to build its international footprint from the sleepy British Columbia town of Nanaimo.

Today, Tilray has become the king of pot. The stock has soared more than 10-fold since its initial public offering in July, dethroning Canopy Growth Corp. as the world's largest marijuana company. It sports a market value of about $17 billion, even after a pullback Thursday.

A global focus on medicinal marijuana, backing from billionaire investor Peter Thiel's Founders Fund and a tiny float of traded shares on the Nasdaq have all contributed to making Tilray an overnight sensation and the darling of cannabis on Wall Street for now.

"I think they're perceived as having a very strong management team and it's one of only three Canadian (pot) stocks that has a U.S. listing," said Canaccord Genuity analyst Matt Bottomley. "I think it's the sentiment and excitement and a bit of scarcity of stocks in the U.S."

Tilray's meteoric surge -- the stock more than doubled this month alone and is worth more than Barrick Gold Corp. -- comes amid an investor frenzy surrounding Canada's nascent marijuana market as the nation is poised to legalize recreational pot next month.

Investors are watching for the next big tie-up in the sector. This week, beverage giant Coca-Cola said it's interested in drinks infused with CBD, the non-psychoactive ingredient in marijuana that treats pain but doesn't get you high. Constellation Brands is now the biggest shareholder of Canopy Growth after a $3.8 billion investment, and Diageo is holding discussions with at least three Canadian cannabis producers.

Though there are more than 100 licensed producers in Canada, there's a scarcity of quality cannabis companies that could be involved in a strategic venture with major firms, Bottomley said. Tilray is one of the top four companies in the industry based on their international strategy, which will be key to supporting the company, he said.

Tilray is controlled by Seattle-based Privateer Holdings, which was founded by Brendan Kennedy, Michael Blue and Christian Groh in 2010 to invest in the cannabis sector, with some early backing from Thiel's fund. Kennedy, 46, serves as Tilray's chief executive officer. Kennedy and Blue are both graduates of Yale School of Management's MBA program, while Kennedy and Groh worked together at SVB Analytics, a non-bank affiliate of Silicon Valley bank.

While Privateer is run from the U.S., Tilray's operations are based in the former coal-mining town of Nanaimo on Vancouver Island, about 125 miles (200 kilometers) across the Juan de Fuca Straight from Seattle.

Tilray began construction of a 60,000 square-foot research and production facility in Nanaimo in 2014 and it began operating four months later with a license from Health Canada, according to a report from Nanaimo Economic Development. The facility houses 40,000 marijuana plants in 33 cultivation rooms, allowing Tilray to make more than 50 strains of cannabis. Tilray is now one of the largest employers in the city, and has 330 staff overall.

The company produces medical cannabis in Canada and Europe and has supplied products to tens of thousands of patients in 10 countries spanning five continents through its subsidiaries in Australia, Canada, Germany and through agreements with pharmaceutical distributors, according to company documents. With medical cannabis now authorized at the national or federal level in nearly 30 countries, the legal market is in its early stages and the number of countries where the drug is legal will continue to increase, according to Tilray's latest quarterly earnings statement.

Tilray has agreements to sell pot in Canadian pharmacies including Shoppers Drug Mart and is investing in production capacity in Portugal so it can supply the EU from within Europe, Kennedy said in an interview. The company also has its High Park brand for the recreational market in Canada, which has secured supply agreements with seven provinces and territories, he said. Tilray has two processing plants in Ontario.

"Our long-term vision is if a patient walks into any pharmacy in any country in the world that has legalized cannabis, that patient should be able to obtain a Tilray product. That's our global goal," Kennedy said in the interview this week.

Tilray is expected to become a significant player in Ontario and is "uniquely situated" to attract investment from players in alcohol and pharmaceuticals due to its global reach and large portfolio of brands and products, Eight Capital analyst Graeme Kreindler said in an Aug. 13 report. The company already has an agreement to develop medicinal cannabis with Sandoz, the Canadian division of Novartis AG of Switzerland, and could be a natural fit for pharma "with possible investment from a global player occurring within the next 12 months," he said.

Earlier this week, Tilray received approval from the Drug Enforcement Administration to import cannabis into the U.S. for medical research, the first Canadian company to do so. The move marks Tilray's first clinical trial in the U.S. and supports the company's medical cannabis prospects as it competes with Canopy in an "IP-arms race," Cowen analyst Vivien Azer said in a Sept. 18 note.

Still, there are skeptics. Despite the ballooning valuation, the company had just $20 million in revenue last year. Citron Research said it remains short on Tilray, calling the stock's surge "beyond comprehension" in a Tweet Wednesday.

"It's a bubble," Frank Holmes, CEO of U.S. Global Investors Inc., said by telephone. "You can't have a company go from $20 billion to $30 billion to $50 billion market cap that trades at 600 times revenue."

The stock may also be benefiting from a scarcity of shares. Privateer controls 76 percent of the company, leaving just 10 million shares for trading in the public float. By contrast, Canopy has a float of 214 million shares. The limited float makes it more expensive to short Tilray's stock. The small float also means traders who can't find a borrow to short the stock are likely doing daily shorting and covering, buying it back as soon as it falls, Holmes said.

The U.S. listing also helps, making it easier for U.S. day traders and hedge funds to join the ride. Canopy also has a New York listing, as does Cronos Group Inc. Most of the pot stocks trade in Canada for easier listings and to avoid running afoul of laws in the U.S., where recreational cannabis remains illegal at the federal level.

With industry valuations doubling in the last week, there could be a huge "reset button" if there's no large strategic investment in the sector soon, Bottomley said.

"You've got to be extra cautious because certainly the 35 million people in Canada are not supporting the valuation we're seeing," he said.

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Bloomberg’s Aoyon Ashraf, Natalie Obiko Pearson and Steven Frank contributed.