It’s all over except for the counting as it relates to Aphria (NASDAQ:APHA) stock. The announcement that at least two analysts have recommended that shareholders agree to the company’s merger with Tilray (NASDAQ:TLRY) has shares of APHA stock falling with about a week before the vote (as of this writing). However, if you like the prospects of the combined company, than the better play would seem to be to buy APHA stock.
Not that long ago, the spread between APHA stock and TLRY stock was wide enough to warrant significant arbitrage activity. That is dying down as the spread between the two stocks is only about 3% as of this writing.
Once the merger is complete, Aphria shareholders will receive 0.8381 Tilray shares for each Aphria share they own. At TLRY stock’s current price, that would put shares at around $15.25. APHA stock is trading at $14.87
We’ve Seen This Before
Consolidation will be the name of the game among cannabis companies. Many are jockeying for position in anticipation of the United States market opening for business. And that day seems closer than it did a year ago. However, cannabis investors have been disappointed before.
In 2020, many electric vehicle companies raced to go public in anticipation of an administration that would be more favorable to EV manufacturers. The same was true of cannabis companies in 2018.
Of course, the payoff didn’t emerge. Conditions certainly seem more favorable for some progress in 2021. But legalization of cannabis still appears to be a state-by-state affair. For now.
Manage Your Expectations
And that suggests some caution is in order for investors in APHA stock. Cannabis investors looking to gain access to the U.S. market may be better off looking at a multi-state operator (MSO) such as Curaleaf (OTCMKTS:CURLF). Current Tilray chief executive officer Brendan Kennedy expressed skepticism about the MSO model becoming the norm in the United States.
Kennedy, who will be the chairman of the board for the new company believes that it’s possible that the MSO model will not be the model of the future. “I think it looks more like tobacco,” says Kennedy. “I think it’s more like alcohol.”
And the alcohol, or infused beverage model, is one reason that many analysts love the Aphria-Tilray company going forward. Aphria acquired SweetWater Brewing in 2020 for $300 million. SweetWater sells the most popular hemp-flavored beer in the country. As Aphria said, SweetWater provides, “a platform and infrastructure for access to the U.S. market more quickly in the event of federal legalization.”
Of course, just having an opinion doesn’t mean federal legislation is a sure thing. Investors would be wise to deal with the business model that exists.
Buy APHA Stock For Tomorrow, Not Today
Understandably, much of the activity in APHA stock is based on the merger. Once that’s complete (likely sometime in the second quarter), investors will have to turn their attention back to the underlying business.
And there’s a lot to like with the combined companies starting with the potential scale that will exist in the Canadian market. Plus, Aphria and Tilray both have established operations in Europe which could be a new growth market.
However the United States remains the largest opportunity for all cannabis companies. That’s the reason the SweetWater brand will be so critical to getting an infrastructure developed. But it’s also still unclear how long it will take to build out that infrastructure.
Right now, Aphria investors will get TLRY shares for a discount to TipRank’s $24.46 price target. The true test of this investment will be to see if the stock will move significantly higher. And that’s no sure thing. Revenue estimates for the Tilray side of the business are down approximately $8 million since the company reported earnings in February.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.