Can the loss-making company turn things around given its recent merger news and changing cannabis laws?
Tilray Inc. (NASDAQ: TLRY) is a global leader in cannabis research, cultivation, processing, and distribution. The company aspired to lead, legitimize, and define the future of the cannabis industry by building the world’s most trusted cannabis and hemp company.
Tilray has just announced that it will be combining its operations with Aphria (TSE: APHRA). The merger will create a $3.8 billion entity, trading under Tilray’s name and ticker symbol, and will be the largest global cannabis company once the merger is complete.
The bull case for Tilray
The Aphria-Tilray merger is great news for the company and will open many doors for possible future growth. The merged company will be well-positioned to pursue global growth opportunities thanks to the combining of both company’s assets. Aphria’s medical cannabis and distribution center in Germany and Tilray’s low-cost cannabis production facility in Portugal, used for its low-cost labor and expenses with great export capabilities due to its tariff-free access across the EU, will complement each other and increase global output at lower prices. The combined company also plans to have a strong consumables business with SweetWater Brewing Company, selling alcoholic and cannabis-based beverages, as well as Manitoba Harvest, which is a leader in hemp food manufacturing and CBD and wellness products.
Society’s attitude towards cannabis use is rapidly changing, with the drug becoming more accepted globally. We are seeing some countries legalizing the drug for recreational use, with many allowing the consumption of cannabis for medical use. With the pandemic’s massive toll on government tax revenue, I expect to see some countries looking at the legalization of cannabis production as a means of income generation through taxes, as well as a way to create jobs.
The bear case for Tilray
I would describe Tilray as a high risk, high reward, long-term play. Its long-term success is extremely dependent on the progress of cannabis legalization worldwide in the next 5 to 10 years. The company’s financials show that the growing of cannabis has been inefficient and costly, but I’m hoping that the merger with Aphria will prove successful thanks to the expansion into lower-cost countries for production and tariff benefits. The company had incurred a total net loss of $268.1 million in the first 9 months of 2020; compared to a $102 million net loss during the same period in 2019. Q3 2020 revenue was $51.4 million, the same as Q3 2019. Adult-use and international medical sales grew 26% and 42% respectively, with hemp revenue increasing by 28% to $20 million. These figures are impressive, but the average cannabis net cost per gram increased from $2.28 in Q3 2019 to $4.23 in Q3 2020, due to the discontinuation of bulk sales and increased sales of edibles and vaporizers which have higher costs. Gross margin decreased from 31% in Q3 2019 to a disappointing 7% in Q3 2020. I hope to see Tilray increasing margins and profitability soon, and I’m confident the recent merger will serve as a push in the right direction, both lowering costs and increasing the entire company’s market share worldwide.
So, should I buy Tilray stock?
Usually, I like to answer this with a straight yes or no. But, for Tilray’s case, I think this one really depends on your risk appetite. This stock is definitely on the higher-risk side of things, especially seeing as it’s a company with its long-term success counting on many uncontrollable variables such as global politics and the legalization of cannabis. I hope to invest in this stock soon, and the Aphria merger has been a big advantage for me — I really think it will set the company on the right track for growth in the long term. I don’t expect this stock to aggressively grow in the near future, due to the bureaucracy of legalizing cannabis, but I’m still confident that more countries will ease cannabis prohibition which will lead to demand for Tilray.
When will the Aphria-Tilray merger be complete?
The merger is expected to finalize in Q2 of next year.
Is Tilray profitable?
No. Tilray’s CEO was expecting to achieve profitability by the end of this year, although that is looking unlikely given Q3’s financial results.
Does Tilray pay dividends?
Tilray does not pay a dividend currently. It’s unlikely it will in the next decade, in my opinion, as the company will likely focus on constant growth.