Volatility In Tilray Will Likely Continue After Its Recent Merger

Canadian cannabis group Tilray (NASDAQ:TLRY) has been on a roller-coaster ride. So far in 2021, TLRY stock is up over 100%, and saw a multi-year high of $67 in February. But now the shares are less than $17.

Tilray (TLRY) logo on a web browser.
Source: Jarretera / Shutterstock.com

By comparison, the Cannabis ETF (NYSEARCA:THCX), a marijuana-themed exchange-traded fund (ETF), is up only about 42% on the year.

Tilray’s management has pinned its hopes on the “new” Tilray. In early May, Tilray announced the completion of the merger with Aphria, another Canadian cannabis company. Irwin Simon, the former head of Aphria, has been appointed as the chairman and CEO.

The combined company’s stock trades under the ticker symbol TLRY on both Nasdaq and the Toronto Stock Exchange. The new entity has become the largest cannabis group worldwide, based on pro forma revenue.

However, investors have not been too enthusiastic about the completion of the merger between the two names that values TLRY stock at a market capitalization of $6.9 billion. Unless the fundamentals of Tilray improves and the U.S. legalizes marijuana at the federal level, another significant increase in Tilray shares is unlikely. Here’s why.

Tilray Q1 Earnings at a Glance

On May 10, Tilray filed the quarterly report 10-K with the SEC. But management has neither issued a press release nor held a conference call. Analysts were not impressed with the results.

Total revenue of $48 million showed a decline of 7.8% from last year. The net loss was close to $341 million, an increase of 85.2% from 2019. Basic and diluted loss per share was $2.01, up 16% from the loss of $1.73 same period prior year. Cash and equivalents at end of period stood at $416.37 million, up 239.3% from the previous year. 

Tilray has two operating and reportable segments, based on major product categories: cannabis (about 65% revenue) and hemp (about 35% of revenue). Cannabis is further divided into three categories:

  • Adult-use (i.e., retail recreational in Canada) – about 63% of cannabis revenue
  • Canada (medical) – about 10% of cannabis revenue
  • International (medical) – about 27% of cannabis revenue

Commenting on the completion of the merger between Tilray and Aphria, Simon cited, “Our focus now turns to execution on our highest return priorities including business integration and accelerating our global growth strategy.”

Now, Tilray  claims to have “the largest global geographic footprint in the industry.” It has high hopes for penetration in the U.S. market through its subsidiaries Manitoba Harvest, CBD products, and “cannabis lifestyle-branded craft brewer” SweetWater Brewing.

Despite management’s upbeat words, investors have not hit the buy button after the release of the earnings. Unprofitability has become the norm in the pot sector, and Tilray is no exception.

TLRY stock’s price-sales and price-book ratios currently stand at 7.3, and 5.4, indicating a frothy valuation level.

Potential U.S. Federal Legalization Crucial

Cannabis is an agricultural commodity whose production is capital-intensive. Since the early days of Canadian legalization, the industry has been struggling with supply-chain issues and the lack of sufficient demand to push these pot firms into profitability. In other words, Tilray and its peers desperately need federal legalization in the United States.

A growing number of U.S. states have now legalized marijuana. Yet it is still illegal under federal law, and pot cannot be transported across state lines. Moreover, the lockdown in major cities due to the pandemic has disrupted the demand in dispensaries. 

According to Statista, the legalization of soft drugs is more welcomed compared to the last decade: “In 2018, two-thirds of adult Americans believed cannabis should be made legal in the United States. Back in 2003, only about a third of Americans was in favor of legalization, while more than 60% of the population was against it.”

Recent cannabis industry metrics suggest that the U.S. cannabis industry is worth $61 billion. It is expected to reach $100 billion by 2030. However, this amount is not large enough to sustain the Canada-based industry and companies like Tilray.

The result of the U.S. presidential election in November meant a state of euphoria for investors who bet on U.S. federal legalization. However, despite increased acceptance to cannabis-lifestyle products, full legalization in the U.S. and other global markets could easily take another few years, if not more.

So, the status quo continues to put significant pressure on pot shares.

The Bottom Line on TLRY Stock

As we approach the first half of 2021, TLRY stock is more appropriate for speculation as opposed to a long-term investment.

For Tilray shares to have a sustained rally that will  potentially take them to $20 or even above, management needs to show strong fundamental results soon.

Finally, those investors who do not want to commit full capital to TLRY stock might consider buying an ETF that provides exposure to marijuana shares. Examples include the AdvisorShares Pure US Cannabis ETF (NYSEARCA:MSOS), the Amplify Seymour Cannabis ETF (NYSEARCA:CNBS), the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), or the Global X Cannabis ETF (NASDAQ:POTX).

On the date of publication, Tezcan Gecgil 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.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.


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