The Tilray Merger Won’t Make Aphria Stock Any More Appealing

Aphria (NASDAQ:APHA) stock could be in trouble. The company reported terrible fiscal third-quarter results on April 12, indicating that my negative thesis on marijuana stocks remains very much intact.

Marijuana plants growing in a greenhouse.

Source: Shutterstock

Moreover, the outlook of Aphria’s merger partner, Tilray (NASDAQ:TLRY), is worsening. Given these points, I recommend that investors sell APHA stock.

There are new indications that Congress will fail to legalize cannabis in 2021 and 2022, which makes things look even worse for Aphria.

For its fiscal Q3 that ended in February, the Canadian cannabis producer and distributor reported that its overall top-line revenue fell  4.3% versus Q2 to $123.8 million, while its net cannabis sales fell 7.8% year-over-year and nearly 24% versus Q2 to nearly 441.7 million.

Finally, the amount of cannabis sold by the company tumbled 30% quarter-over-quarter to 18,595 kilograms.

Also very bearish on the company’s results was Canaccord Genuity analyst Matt Bottomley who downgraded the stock to “hold” from “speculative buy.”

“We believe the company’s quarter signals a number of red flags likely to impact most {cannabis} operators,” he wrote.

I could not agree more.

A Closer Look at APHA Stock

I believe that, due to the lower-cost competition of illegal marijuana dealers and the continued stigma against marijuana use in much of society, cannabis companies globally will find it extraordinarily difficult to thrive and generate profits.

Marijuana stocks have rallied tremendously this year, largely based on speculation that the U.S. Congress would legalize cannabis.

Indeed, even after the recent pullback of APHA stock, the shares are up 95% so far in 2021. Meanwhile, the shares of Tilray, with whom Aphria has agreed to merge, have surged 99% in 2021.

But recent information suggests that, as I had previously predicted, Congress won’t legalize cannabis anytime soon.

In all likelihood, in order to legalize the drug, all 50 Democratic U.S. senators, plus at least ten Republican senators, would have to back the initiative.

However, Politico recently reported that two Democratic senators are steadfastly opposed to legalizing cannabis, while three more are “undecided” on the issue. Senate Majority Leader Chuck Schumer won’t have the votes to pass it.

Even the prospects of legislation that would allow banks to legally lend to cannabis companies appear uncertain at best. That’s because the Democratic chairman of the Senate Banking Committee, Sherrod Brown, wants to add “social justice” provisions onto the SAFE Banking Act passed by the House.

Those provisions would make it difficult to support the legislation,” Cowen analyst Janet Seiberg wrote.

Like legalization,  the SAFE Banking Act would likely have to get a thumbs-up from at least 60 senators to become law.

Although Seiberg says the SAFE Banking Act is supported by 60 senators, I have my doubts whether the senators who oppose cannabis legalization will ultimately support allowing banks to legally lend to cannabis companies.

Tilray’s Results Weren’t Great Either

The company’s Q4 revenue rose just 10% versus Q3, although the sales of its cannabis unit jumped 31% quarter-over-quarter.  Moreover, its total cannabis kilogram equivalents sold dropped to 6,901 kilograms 54% lower that in last year’s fourth quarter.

Stone Fox Capital reported that Aphria and Tilray combined ” saw market share in the recreational cannabis market dip from 22% to only 19%” last quarter. Additionally, “Tilray is predicted to have seen market share nearly fall in half to only 4.2% in Q1,” Stone Fox noted.

The Bottom Line on APHA Stock

Aphria’s miserable Q2 results disappointed and the prospects for U.S. legalization of cannabis, which appears to be largely baked into the shares of Tilray and Aphria, look bleak.

Tilray’s Q4 results were nothing to write home about and both companies are reportedly losing market share.

All in all, it’s clear that the best days of both APHA stock and Tilray’s shares are behind them.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.


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