On June 3, Cantor Fitzerald analyst Pablo Zuanic upped his rating on Tilray (NASDAQ:TLRY) from neutral to overweight. However, at the same time, Zuanic lowered his price target on TLRY stock to $22, down from $30.25.
I must admit I’ve never been able to understand analyst decisions about stocks they cover.
If a stock’s target price is lowered by $8.25, as is the case with Tilray, how is it suddenly a buy? Alternatively, if you raise its rating from neutral to overweight, how is an $8.25 cut to its target price justified?
In the end, paying attention to analyst ratings is probably not a good idea. So for this article, I’ll look at why buying its stock under $20 is a good move.
What Does It Take for TLRY Stock to Rise Above $22?
There are two ways to look at Tilray’s current share price.
Either you are incredibly disappointed that it’s trading about one-third the value of its 52-week high of $67. Alternatively, you could be pumped that it’s recovered from its May lows when it traded below $13.50.
If you assume the Cantor Fitzerald analyst is on the money with his target price, TLRY stock has 11% upside as I write this over the next 12 months. So, what does it have to do to get to $22 and stay there?
Zuanic put it nicely in his note to clients.
“‘We do not see another [licensed producer] that can make these combined claims,’ said Zuanic, who called Tilray’s stock a ‘bellwether’ for the sector. He also sees tailwinds for the sector as the pandemic eases and cannabis demand picks up,” The Street.com reported.
The analyst refers to its leading position in both the Canadian recreational market and its presence in large international markets in Europe and elsewhere.
Aphria brought to the table its merger with Tilray, a large medical distribution infrastructure in Germany, through its CC Pharma subsidiary. As a result, Tilray brought to the table a state-of-the-art 2.7 million square foot EU-GMP low-cost cannabis cultivation and production facility.
As Tilray gains market share in Germany, United Kingdom, France, Italy, and elsewhere in Europe, it will continue to grow its market-leading position in Canada. In addition, it’s got Manitoba Harvest for its North American hemp and wellness platform and Sweetwater Brewing for cannabis-infused beverages.
If Tilray can make inroads in all four of these areas, I don’t see how TLRY doesn’t rise above $22 in the next 12-18 months, making the analyst’s cut in target price appear shortsighted.
What Could Go Wrong?
The best-laid plans of mice and men. In other words, Tilray’s unlikely to achieve all its future goals. So, the question on the minds of most TLRY investors is figuring out what’s likely to happen in the next 12-24 months to move the goalposts.
InvestorPlace’s Tezcan Gecgil recently stated that Tilray’s fundamentals would have to improve and the U.S. legalize marijuana at the federal level before TLRY stock moves any higher. Unfortunately, neither of these seems likely in the near term.
However, once Tilray has had a year to integrate Aphria into the fold, I think the future possibilities will become much clearer to investors. In the meantime, the stock’s likely to gain more media coverage given its size and scale.
The other issue that could slow Tilray is competition from Canadian competitors like HEXO (NYSE:HEXO). It recently announced it would pay 925 million CAD ($770 million) to buy Redecan, Canada’s largest privately-owned licensed producer. With the cash-and-stock acquisition, HEXO becomes the largest company by recreational market share in Canada’s four largest provinces: Quebec, Ontario, Alberta, and British Columbia.
I have liked HEXO for some time because of Truss Beverages, the company’s 50/50 joint venture with Molson Coors’ (NYSE:TAP) Canadian subsidiary. However, now that it’s challenging for top market share in the Canadian recreational marketplace, HEXO CEO Sebastien St-Louis must be considered a serious threat to Irwin Simon, Tilray’s higher-profile chief executive brought in in December 2018 to right the ship.
Cowen & Co. analyst Vivien Azer believes Tilray will be the first Canadian cannabis company to hit $1 billion in domestic sales. However, HEXO’s merger with Redecan throws a wrench in those plans.
Simon recently told Bloomberg that he’s frustrated at the pace of change in the Canadian pot industry.
“If the Canadian market doesn’t change and legalization happens in the U.S., the Canadian market becomes an afterthought,” Simon told Bloomberg. “What I want to do is take an industry that Canada was first to get to market and make sure we don’t get left behind.”
The Bottom Line
I remain convinced that there’s enough room in the Canadian market for more than one dominant player. Tilray can do well alongside HEXO and Canopy Growth (NYSE:CGC).
From where I sit, TLRY stock remains attractive under $20.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.