After consolidating over the past month, is Canadian cannabis company Tilray (NASDAQ:TLRY) ready to breakout?
The Canadian company’s stock nearly went to the moon in February of this year when it was targeted for a short squeeze by retail investors who frequent the r/WallStreetBets sub-Reddit forum. In only a few days, TLRY stock gained 272%, rising to a peak of $67 from $18.10 a share.
The stock has since fallen back to Earth and spent June trading in a range of $17 to $20. July has seen the share price fall 10.6%, closing last week at $16.17 a piece. By comparison, the Cambria Cannabis ETF (BATS:TOKE) is only down 3.87%. TLRY stock is the largest holding in the 28-stock exchange-traded fund’s portfolio, at 13.95% of its assets. That’s nearly twice the weight of the #2 name, Innovative Industrial Properties (NYSE:IIPR), the REIT that operates specialized properties for regulated medical-use cannabis facilities.
Now, as we enter the second half of the year, optimism is building for TLRY stock to have another, more sustainable breakout.
Much of the enthusiasm for Tilray stems from the fact that the company is now Canada’s largest cannabis producer following its recently completed merger with former rival Aphria. The new company, which continues to use the Tilray name, boasts annual revenues of $1 billion and a 17% share of the North American recreational cannabis market.
Jefferies Financial Group (NYSE:JEF) called the Tilray-Aphria merger a “perfect match” and upgraded TLRY stock to “buy” from “underperform” after the deal closed. Jeffries, and others, say the beefed up Tilray is in a good position to grow its sales globally, particularly in the U.S. where a growing number of states are legalizing cannabis use, and where there continues to be hope that the Biden administration will legalize the drug at the federal level.
Immediately, Tilray says it is focused on completing the internal integration of Aphria now that the merger has been finalized. The company has said that it hopes to achieve pre-tax cost savings of $100 million within the next 18 months as synergies are achieved and duplication is eliminated. Beyond that, Tilray continues to look abroad for opportunities and plans to further expand its presence in Germany, where Aphria had a sizable share of that country’s medical cannabis market, and enter entirely new markets, such as Israel and Portugal.
Tilray has said that it needs to grow beyond Canada given that market is forecast to reach its saturation point within the next five years. Market research firm Brightfield Group anticipates that Canada’s cannabis market will peak at 8.6 billion CAD ($7 billion) by 2026. While that would be double the 4.6 billion CAD in cannabis sales expected to be generated this year, the growth rate in Canada is forecast to be less than 4% within five years. Long-term, Tilray needs to look beyond its home country for continued growth opportunities.
Another area of expansion for Tilray is in cannabis-infused drinks. The Aphria acquisition gives Tilray the SweetWater Brewing Company, an Atlanta-based microbrewery. Should cannabis beverages become legal in the U.S., Tilray will be nicely positioned to capitalize through SweetWater. In the meantime, Tilray has a partnership with Anheuser-Busch InBev SA (NYSE:BUD) to create cannabis beverages for the Canadian marketplace under a joint venture called Fluent Beverage, which launched in late 2019.
Beverages are one of the fastest growing segments of the cannabis space. Analysts at GrandView Research forecast that cannabis beverages will be worth $2.8 billion by 2025 and expand at a compound annual growth rate (CAGR) of 17.8% over the next four years. The majority of the growth is expected to come from the North American market.
Warrants Small Position in TLRY Stock
If there is one hurdle in Tilray’s path it is that the company needs cannabis legalization to happen at the federal level before it can enter the U.S. market. How long that could take is unknown at this time. It looms as a shadow over TLRY stock.
As it waits, Tilray will continue to look towards Europe and possibly Asia for expansion. And while cannabis markets continue to develop and evolve, Tilray, as a company, is arguably now in the strongest position it has ever been in to seize new opportunities.
Here below $17 a share, TLRY stock is quite affordable and offers some upside potential. Year-to-date the stock is up 95%. But following its consolidation over the last month, the next leg up could be close at hand. The median price target on the shares is $17.50, about 8.23% higher than where it is now, but the high estimate on the stock is $23 per share, offering 42.2% upside.
With favorable developments in the cannabis space and its merger with Aphria now in the rearview mirror, now is a good time for investors to look ahead and bet on the future of TLRY stock.
On the date of publication, Joel Baglole 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.