$8 Billion Weed Merger – Buy or Sell?

The cannabis sector has a new king – an $8 billion, international juggernaut with more than a half-billion in revenue in the last 12 months.

I am going to reveal three key reasons why I call this early industry leader a long-term buy and hold.

Tilray, Inc. (TSX: TLRY, NASDAQ: TLRY) is a Canadian cannabis company that just became the largest in the world after shareholders approved one of the largest mergers in the history of the cannabis industry. Here are some more details from Tilray.

Tilray, Inc. (“Tilray”) and Aphria Inc. (“Aphria”) today announced the completion of the previously announced business combination, ushering in a new era in the global cannabis industry. The combined company, which will operate as Tilray (the “Company”), brings together two highly complementary businesses to create the leading cannabis-focused consumer packaged goods (“CPG”) company with the largest global geographic footprint in the industry. The combined company had a market cap of approximately US$8.2 billion based on the closing stock prices on April 30, 2021.

Tilray’s merger with Aphria has been polarizing. Some analysts love it and others hate it. But I think Tilray is a long-term buy and hold and that Tilray is in position to dominate the European cannabis market.

3 Reasons I Rate Tilray as a Long-Term Buy and Hold

#1 – Largest Cannabis Company in the World by Revenue

The merger of Tilray and Aphria has created the largest cannabis company in the world by revenue. In the most recent quarterly results, Tilray and Aphria combined to deliver $211 million in revenue.

This is the highest quarterly revenue number in the entire global cannabis industry and more than U.S. powerhouses such as Green Leaf, Cresco, and Curaleaf. It also puts Tilray on course to potentially be the first cannabis company to report $1 billion in annual revenue.

#2 – $81 Million in Synergies in 18 Months

Becoming profitable is one of the biggest challenges facing young cannabis companies. This merger will move Tilray closer to profitability by cutting annual costs by tens of millions. Tilray said it expects to achieve $81 million in synergies in 18 months. This will have a big impact on Tilray’s financial position and help move the company much closer to a profit.

#3 – The #1 International Cannabis Play

Tilray has the best international footprint in the global cannabis industry. It currently has operations in five continents and 18 countries. Take a look at the map below.

Image from Tilray’s website.

But at its core, Tilray is a play on the European cannabis market. Many analysts believe the European Union (EU) will eventually grow into the largest cannabis market in the world – after all, it does have a population of 750 million, which is twice the population of the U.S.

Headquartered in Germany, Tilray Europe has established itself as the clear industry leader in the EU.

Tilray Portugal owns a 50-acre indoor, outdoor production, and processing facility in Portugal. This facility is one of the only and largest in Europe.

Image from Tilray.

This mega facility is the cornerstone of Tilray’s Europe strategy. Tilray is using this production facility to supply medical cannabis markets all across Europe, including Portugal, France, and Germany. Here are some more details from Tilray.

  • In May 2019, Tilray Portugal received its first manufacturing license and initial GMP-certification, allowing the company to manufacture and export bulk dried medical cannabis and wholesale dried cannabis as active substances used as starting materials.
  • In September 2019, Tilray completed its first export to Germany from its EU campus in Portugal which was one of the largest inter European bulk shipment of medical cannabis to date. Thus far, Tilray has supplied medical cannabis products to Germany and Israel from its EU campus in Portugal.
  • In December 2019, Tilray Portugal received an additional GMP-certification which allowed Tilray to supply international markets with pharmaceutical-grade dried flower and oils as finished medical cannabis products.

Aphria is also an early leader in Europe, particularly in Germany, which is the largest country in Europe. Aphria was one of the first cannabis companies to receive a permit and import medical cannabis into Germany. The permit helped Aphria establish itself as an early leader in the young German cannabis market.

The European cannabis market is still extremely immature and underdeveloped. But in the long run, I expect the EU to grow into a massive market, and Tilray is positioned to capture that growth.

Tilray Shares are Down 65% from the 52-Week High

Tilray shares have been on a wild ride for the last six months. Shares rallied hard at the end of 2020 and early 2021 before falling sharply in the last few months.

As it stands, shares are down 65% from the 62-week high. This may not be the exact low of this bear market but in the long run, this pullback looks like a great opportunity.

Risks to Consider

Tilray has a high valuation. Its price-to-sales ratio of 8 is a sharp premium to the broader stock market. Investors are clearly pricing in a lot of good news, and Tilray will need to meet lofty expectations. Tilray doesn’t have a strong presence in the U.S. cannabis market, currently the largest and fastest-growing in the world.

The Big Picture on the Tilray Merger

Tilray just became the largest cannabis company in the world after its merger with Aphria.

The deal is a play on the European cannabis market, which many analysts believe will grow into the largest in the world.

I expect the European cannabis market to thrive in the next few years, and I expect Tilray to capture that growth.

About the Author & Cannabis Stock Trades

Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.