One of the more groundbreaking developments in the investment market in recent memory has been the legal cannabis sector. Previously a maligned and illegal black market, the botanical industry is steadily becoming a legal and taxable one worldwide. However, intense competition quickly came in, with companies like Aphria (NASDAQ:APHA) wanting a piece of the pie. Suddenly, legalization wasn’t such a great idea, with the crowds pounding APHA stock.
When all cannabis products were under strict governmental controls, this limited the overall profitability of the green industry. But at the same time, the limitations also extended to the competition. With a high barrier of entry, many would-be weedpreneurs simply took a pass. But now that legalization dropped this standard, many companies that ordinarily would have been discouraged to compete quickly arrived on the scene.
At first, the enthusiasm for investments like APHA stock was robust. However, the sheer volume of competition quickly diluted profitability potential. After all, for the average consumer weed is weed — it’s hard to distinguish one brand from another.
That’s why the pending merger of Aphria and Tilray (NASDAQ:TLRY) is intriguing. Should the deal go through as planned, the combined entity will become the world’s largest global cannabis company by sales. Indeed, mergers and acquisitions may be the only way to make the sector sustainable, at least in the near term.
Arbitrage in APHA Stock
Speaking of near-term catalysts, our own Will Ashworth described the arbitrage opportunity for APHA stock. Ashworth goes through the math in detail but the bottom line is that TLRY is arguably overpriced. However, Aphria is undervalued relative to Tilray, which sets up an interesting trading opportunity.
If you believe the merger will go through successfully, it’s possible that you can profit from going long APHA while shorting TLRY as the two equity units reach a valuation that is commensurate with the terms of the merger.
It’s a heckuva risk but it’s there if you want it.
International Opportunity Adds Intrigue
What worries me about the arbitrage argument is that most such scenarios are fleeting. You might find them in the afterhours session but it’s not too often that they’re available for several sessions, waiting for any investor to mull over and exploit.
Therefore, my thinking in this situation is that if you’re interested in APHA stock, you should do so because of its underlying fundamentals. It’s not guaranteed that the merger will go through, although it should.
Assuming that a deal is reached, what’s intriguing about the Aphria-Tilray combo is their focus on the international market. For sure, everyone in the cannabis sector is eyeballing the U.S. — that’s where the demand is. But looking over the horizon, the combined entity could benefit from their global ambitions.
Primarily, Tilray spearheaded multiple groundbreaking events. According to the company’s website, it was the first company “to legally export medical cannabis from North America to Australia and New Zealand.” Tilray was also the first “to legally export medical cannabis products from North America to Europe.”
On Aphria’s side of the ledger, the cannabis firm has operational footprints in Europe and South America. This global operational experience could serve the combined entity well as the international market gradually warms to cannabis.
Back in November 2018, Newsweek reported that several Asian countries were rethinking the issue of legalization, at least for certain circumstances. Notably, Malaysia “announced that it would abolish the death penalty for 32 offenses, including drug charges.” This came after protests following the controversial death sentencing of a Malaysian man who sold medicinal cannabis.
Also, South Korea, which has very conservative anti-drug policies, amended its laws to allow imports of CBD-infused products. Further, in “China and Japan, marijuana remains illegal but officially sanctioned research into the plant’s potential benefits has been approved along with limited cultivation,” Newsweek reported.
By just buying APHA stock directly for its relative undervalued status to TLRY, you could enjoy long-term upside benefits.
Time Is a Killer for This Thesis
But before you rush into APHA stock, you should realize that even with global cannabis expansion, the U.S. will still own the lion’s share of the market.
According to an ArcView Market Research and BDS Analytics report, the cannabis sector will reach $40.6 billion by 2024. However, the U.S. will account for about $30 billion or 73% of this sector. Therefore, true international viability for weed may be years, perhaps decades down the line.
And with the U.S. being the dominant player in cannabis, the black-market dilemma is especially problematic during this pandemic. That’s because law enforcement has bigger problems on its hands than to worry about someone lighting up.
If you’re going to buy APHA stock, I’d be careful. The botanical industry has enjoyed a massive resurgence but new questions about viability have sprouted over the trailing year.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
