Tilray (TLRY) jumped nearly 23% on Dec. 16 after it announced plans to merge with rival Canadian pot producer Aphria (APHA). So, is Tilray stock a buy right now?
The $3.9 billion deal would create a massive, multinational cannabis company, with business in Canada, the U.S. and Europe. The combined company would take the Tilray name and ticker.
But Tilray, as it stands now, is trying to rein in losses, even as the incoming Biden administration in the U.S. raises hopes of looser pot restrictions and, potentially, broader Canadian entry into the market.
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Tilray Stock Fundamental Analysis: Profits Elusive
Tilray stock began trading in July 2018 on the Nasdaq via an IPO. That IPO was the first on a big U.S. exchange from a pure-play cannabis company. But the stock largely fell through 2018 and last year, when industrywide concerns about profitability, sales growth and cash grew more severe.
Earnings growth is a staple of top stocks. But Tilray’s EPS Rating stands at a 23, with 99 being the best possible. Other marijuana stocks also have weak profit ratings. The EPS Rating is a gauge of a company’s profit growth.
In November, Tilray said it was “poised to deliver positive or break even Adjusted EBITDA in the fourth quarter of 2020.” EBITDA stands for earnings before interest, taxes, depreciation and amortization.
Third-quarter sales missed expectations. But the company’s loss was narrower than expected.
Tilray And The Election, Coronavirus
The company has tried to boost sales via its Canadian recreational business, international medical business, and via Manitoba Harvest, a hemp-foods company Tilray bought last year.
In the U.S., five states voted on Election Day to legalize medical or recreational cannabis. Tilray CEO Brendan Kennedy said legalization in New Jersey, one of those states, could turn neighboring states like New York and Pennsylvania legal.
“Adult-use legalization in New Jersey is likely to have a domino effect on the states of New York, Pennsylvania, and Connecticut, as elected officials are worried that their residents will go to New Jersey to purchase product and thereby not generate tax dollars in their home state,” he said on the company’s third-quarter earnings call.
However, the company has remained cautious on selling CBD in the U.S. While the U.S. has legalized hemp, a source of CBD, crackdowns on retailers by authorities have made businesses reluctant to sell products containing the substance.
Tilray in November said it would “address the federal CBD market upon further clarity from the FDA.”
The incoming Biden administration has led investors to place bigger bets on federal cannabis reform in the U.S. But the Democrats’ agenda hinges on the composition of the Senate, where two runoff elections in January will determine whether the GOP can retain a majority, and potentially squash bigger legalization efforts.
The House in December passed the MORE Act, which would remove cannabis from the list of controlled substances, but leave pot laws up to individual states. However, that bill has little hope in the Senate.
‘May Remain Volatile’
Tilray is building a hub facility in Portugal to serve its international markets. But it warned that its business in the European Union, where more nations are legalizing medical cannabis, “may remain volatile” in the months ahead as nations like Germany reinstitute coronavirus restrictions.
Kennedy, during the third-quarter earnings call, said Tilray was “not aggressively fighting for market-share gains” in its cheap-weed business — something other producers have introduced to compete with the illegal market. He argued that the segment offered little profit potential.
Kennedy has said that the pandemic could speed the transition from the illegal market to the legal one, as people become more concerned about safety.
Tilray-Aphria Merger
The merger between Tilray and Aphria is expected to close in the second quarter of next year.
Under the deal, the new company will have offices in the U.S., Canada, Portugal and Germany. Its estimated market share would be around 17% in Canada, with $685 million in yearly revenue.
Piper Sandler analyst Michael Lavery, in a research note published the day the merger was announced, said Tilray “stands out from competitors with its direct access to the EU, which we consider a key piece of Aphria’s interest in doing the merger announced today.”
However, he noted, the combined company can’t enter the U.S. marijuana market — as it relates to THC products — until more federal reform passes. Even then, there are “costs and challenges to building brand awareness and adding infrastructure.”
Lavery added: “we do not believe its hemp food or alcohol distribution will be relevant for THC, so we do not expect a benefit from its existing infrastructure. We also do not expect imports from Canada to be permitted, so it would still need local production.”
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Tilray Technical Analysis, Other Marijuana Stocks
Powerful sales growth is a key metric when a company isn’t profitable. It can lead to profitable gains if the technical analysis of the stock proves positive.
The Composite Rating of Tilray stock stands at 41, according to Marketsmith chart analysis. That rating marks an improvement from previous months. But IBD research says investors should focus on stocks with Composite Ratings of 90 or higher.
Tilray’s relative strength line, and shares overall, are off lows reached in March. But the line has largely sunk since Tilray’s debut. The trend indicates that TLRY stock has underperformed the S&P 500.
By comparison, Canopy Growth (CGC) has a Composite Rating of 81 and an EPS Rating of 19. Aurora Cannabis (ACB) has a Composite Rating of 11. Its EPS Rating is 3.
Innovative Industrial Properties (IIPR), a profitable cannabis-focused real estate investment trust, has a 96 Composite Rating. Its EPS Rating is 74.
Tilray stock has not formed a price consolidation since its IPO base after it first began trading.
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Other Tilray News
Earlier in the year, Tilray closed High Park Gardens, a greenhouse in Ontario, in an attempt to cut costs. In February, BNN Bloomberg reported that Tilray planned to lay off around 10% of its staff. The job cuts were the latest in the industry, as losses piled up and over-expansion weighed.
It has also had to book millions in impairments for a deal it struck last year with marketing and entertainment company Authentic Brands Group — a deal the company said could put Tilray-made CBD foot balms and beauty products in retailers like Nine West and Juicy Couture.
“Given the uncertainty of the FDA stance on the sale of CBD products in the U.S., we concluded the near-term expectations for sales under this agreement did not support our balance sheet value,” Tilray CFO Michael Kruteck said in May.
Fluent Beverage Co., a joint venture between Tilray and Anheuser-Busch InBev (BUD), has launched CBD drinks in Canada. Tilray and AB-InBev are also researching THC beverages.
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Tilray Stock Is Not A Buy
Still, Tilray stock is volatile. IBD advises investors, for now, to treat marijuana stocks like other rapidly growing companies — like recent tech IPOs — that are losing money.
Across the industry, marijuana stocks still face competition from the illicit market. Tilray’s fundamentals are still weak.
Here’s the bottom line: Tilray stock is not a buy. Shares are not in a buy zone and haven’t formed any kind of base pattern.
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