Should You Buy the Dip in Tilray?

Shares of the Canadian pharmaceutical and cannabis company Tilray, Inc. (TLRY) tanked this month after rallying significantly on hopes that Congressional Democrats would soon pursue federal decriminalization of marijuana and on the enthusiasm of casual traders uniting on Reddit. With investors’ fading optimism and consequent profit-taking, the stock has lost 57.6% since February 10.

Investors’ concerns surrounding TLRY’s impending merger with Aphria, Inc. (APHA) and possible headwinds for the Canadian cannabis market and/or the U.S. hemp foods market could pose new challenges for the stock.

While the merger with APHA will create a powerhouse in the cannabis industry, the potential for it to succeed will depend on many factors. And it could take some time before the combined entity generates meaningful  profits. Thus, we believe the stock does not have the potential to rebound in the near term.

Here is what we think could influence the performance of the stock in the near term:

A Big Merger Could Present Challenges

Last December, APHA and TLRY entered  an  agreement to merge their businesses and create the world’s largest global cannabis company based on pro forma revenue. However, a merger of this scale is complicated, involving, for example, the estimation cost synergies, operational inefficiencies and high merger cost. Moreover, the companies’ claims that the marriage will create the world’s top cannabis company could be a difficult  support, with TLRY generating loss in the last reported quarter.

Lingering Obstacles in The Cannabis Industry

While the cannabis industry has boomed amid the coronavirus pandemic, with more states legalizing its use, the legalization question remains very much a local one, with policies set by individual counties and cities. Cannabis operations are still largely prohibited outside of corporate structures. In fact, federal cannabis taxation could also be crippling to many businesses. Also,  the future demand for cannabis is expected to be lower than during the pandemic lockdown period as people begin returning to outdoor activities and recreation. These  factors could dent TLRY’s operations and significantly  lower its growth potential  in the near term.

Unimpressive Fourth-Quarter Results

TLRY’s hemp revenue has declined 18% year-over-year to $15.33 million in the fourth quarter ended December 31, 2020. The company generated a net loss of $2.95 million and an operating loss of $21.28 million. Its loss per share was  $0.02 for this period. TLRY’s interest expenses increased 4.5% from the year-ago value to $9.07 million.

Stretched Valuation

In terms of forward ev/sales , TLRY is currently trading at 27.90x, which 203.9% higher than the industry average 9.18x. Its trailing-12-month price/sales of 22.32x is 145.7% higher than the industry average 9.08x. Also, its trailing-12-month price-to-book of 24.72x is 368.4% higher than the industry average  5.28x.

Consensus Price Target Indicates Potential Downside

Currently trading at $27.10, Wall Street analysts expect TLRY’s  stock to hit  $10.97 in the near term, which indicates a potential downside of 60%.

POWR Ratings Indicate Poor Prospects

TLRY has an overall rating of D, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

Our proprietary rating system also evaluates each stock based on eight different categories. TLRY has a Value Grade of F. This is in sync with the stock’s stretched valuation.

TLRY also has a B grade for Momentum, which is consistent with the stock’s 99.1% gains over the past year. It has a C grade for Growth, given its poor revenue and earnings growth prospects.

The stock is currently ranked #221 of 238 stocks in the F-rated Medical -Pharmaceuticals industry. In addition to the grades I’ve highlighted, you can check out TLRY’s POWR Ratings for Stability, Sentiment and Quality here.

If you’re looking for better stocks in the Medical-Pharmaceuticals industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

We think that TLRY’s recent price dip makes the stock  less compelling. Given its concerning merger plans, weak financials, sky-high valuation, and potential headwinds for the cannabis and hemp market, the stock could plunge further in the upcoming months.

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TLRY shares were trading at $28.43 per share on Friday morning, up $1.33 (+4.91%). Year-to-date, TLRY has gained 244.19%, versus a 4.78% rise in the benchmark S&P 500 index during the same period.

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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