Tilray Inc: Pot Stock’s 18.6% One-Day Gain Is the Start of a New Era

Get Ready for a “New” Tilray Stock

Tilray Inc (NASDAQ:TLRY) has been one of the more volatile names in the legal cannabis industry.

For instance, the stock shot up from $6.00 to more than $10.00 in the three trading sessions from November 5 to November 9, thanks to the projected win of Joe Biden in the U.S. presidential election. But then, Tilray stock quickly retraced and had a very choppy ride instead of continuing the upward momentum.

On December 16, though, the stock had another substantial one-day gain. And this time, it could mark the beginning of a new era for TLRY stock.

You see, on that day, Tilray announced that it would be merging with Aphria Inc (NASDAQ:APHA) to create a cannabis giant bigger than any other player in the industry.

Under the agreement, Aphria shareholders will receive 0.8381 shares of Tilray stock for each APHA common share. Tilray stock investors will continue to hold their TLRY shares with no adjustment to their holdings. (Source: “Aphria and Tilray Combine to Create Largest Global Cannabis Company With Pro Forma Revenue of C$874 Million (US$685 Million),” Tilray Inc, December 16, 2020.)

Tilray Inc (NASDAQ:TLRY) Stock Chart

Chart courtesy of StockCharts.com

Once the all-stock transaction goes through, Aphria Inc will own about 62% of the combined company. However, the merged company would use the Tilray name.

On the day of the announcement, TLRY stock closed with an 18.6% gain while APHA stock slipped less than one percent.

Keep in mind that Tilray and Aphria are already prominent companies in the pot industry—partially because they’re listed on major U.S. stock exchanges while many of the other pot stocks are only trading in the U.S. over the counter.

Therefore, this merger is a big deal for pot stocks. In fact, it could be the biggest such deal, based on the amount of sales these two companies have been generating.

On a pro forma basis, Tilray Inc and Aphria Inc generated total revenue of CA$874.0 million (US$685.0 million) in the last 12 months. That makes the combined company the largest global pot company by revenue.

The merger will create a new leader in the Canadian recreational pot business. Canada legalized recreational cannabis nationwide on October 17, 2018, and unsurprisingly, companies have been vying for market share ever since.

Aphria and Tilray collectively generated recreational cannabis gross revenue of CA$296.0 million over the last 12 months, giving the combined company the No. 1 recreational pot market position in Canada. (Source: “Aphria and Tilray Combine to Create the Largest Global Cannabis Company,” Tilray Inc, last accessed December 23, 2020.)

In a note to investors, Tilray’s chief executive officer, Brendan Kennedy, said,

At this nascent stage of development and expansion of the global cannabis market, we believe companies with leading geographic scale, product range and brand expertise are most likely to benefit long-term. By leveraging our combined strengths and capabilities, we expect to be able to meet the needs of consumers more effectively all over the world and advance patient care. With a strong financial profile, low-cost production, leading brands, distribution network and unique partnerships, we believe the Combined Company will be well-positioned to deliver sustainable, attractive returns for stockholders.

(Source: Tilray Inc, December 16, 2020, op. cit.)

The merger is subject to customary conditions and is expected to close in the second quarter of calendar-year 2021.

Note that, while both Tilray and Aphria have growing businesses, Aphria’s recent numbers seem to be more impressive.

In the first quarter of Aphria’s fiscal year 2021, which ended August 31, 2020, the company generated CA$69.6 million of gross revenue from recreational cannabis. (Source: “Aphria Inc. Announces Record Adult-Use Cannabis Gross Revenue in First Quarter Fiscal Year 2021 and Sixth Consecutive Quarter of Positive Adjusted EBITDA,” Aphria Inc, October 15, 2020.)

That represented a 23% increase sequentially and marked Aphria’s sixth consecutive quarter of gross revenue growth.

Moreover, the company’s total net revenue came in at CA$145.7 million in the first fiscal quarter, up 16% from the prior-year period.

Tilray’s most recent earnings report was for the third quarter of 2020, which ended September 30.

For the quarter, Tilray generated $51.4 million of total revenue, which was flat year-over-year and up two percent quarter-over-quarter. (Source: “Tilray, Inc. Reports 2020 Third Quarter Results,” Tilray Inc, November 9, 2020.)

The company attributed the weakness to the discontinuation of bulk sales and a slight drop in Canadian medical marijuana sales. Excluding the impact related to bulk sales, Tilray’s total cannabis revenue would have been up 24% year-over-year.

Aphria Inc also posted more impressive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA)—a cool CA$10.0 million in its most recent reporting period. The amount not only represented a 17% sequential improvement, but also marked the company’s sixth consecutive quarter of positive adjusted EBITDA.

Tilray, on the other hand, incurred an adjusted EBITDA loss of $1.5 million in the third quarter of 2020. While the number was negative, the loss narrowed substantially compared to its adjusted EBITDA loss of $12.3 million in the second quarter of this year.

Given these numbers, I expect the combined company to grow at a faster pace than what Tilray has been doing on its own.

Analyst Take

Tilray Inc is one of the pioneers in the research, cultivation, production, and distribution of cannabis and cannabinoids. It has served tens of thousands of patients and consumers in 15 countries across five continents.

By merging with Aphria Inc, Tilray could be entering a new growth trajectory. And TLRY stock could get renewed attention from pot stock investors.