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With the increasing possibility of federal legalization in the United States, cannabis stocks have been in the limelight.
One cannabis company that looks attractive from a long-term investment perspective is Tilray (TLRY). Recently, the company closed a merger agreement with Aphria, creating the largest cannabis company by revenue.
It seems that Tilray is well-positioned for sustained growth in the coming years. Let’s talk about the positive growth triggers.
Looking at the industry outlook, a MarketsAndMarkets report estimated that the legal cannabis market was valued at $20.5 billion in FY2020. The industry size is expected to swell to $90.4 billion by FY2026. This would imply a CAGR of 28% in the next five years.
In another report, BofA Securities estimated that the global cannabis market (illicit + legal) was worth $186 billion in FY2020. The market size is likely to swell to $300 billion by FY2030.
As more countries legalize cannabis, there could be a seismic shift toward the regulated market. Clearly, tremendous market opportunity lies ahead.
Therefore, it's not surprising that Jefferies analyst Owen Bennett upgraded the stock to Buy from Sell. Bennett has a price target of $23 for the stock. This would imply upside potential of 58.3% from current levels of $14.53. (See Tilray stock analysis on TipRanks)
Key Investment Positives
Last month, it was reported that three top senators are drafting a bill to federally legalize marijuana. If legalization indeed takes place, it ccould be a major stock upside catalyst.
Tilray already has a strong presence in the U.S. hemp and CBD segment. The company has access to 17,000 stores in North America, including Costco (COST), Kroger (KR), and Amazon (AMZN). The company intends to leverage this network for further expansion of CBD and other cannabinoids.
It’s also worth noting that in November 2020, Aphria acquired SweetWater Brewing for a consideration of $300 million. This beverage-cannabis crossover deal is likely to help the company in two ways.
First and foremost, it gives the merged entity an entry into the cannabis-infused beverage market. The market is expected to be worth $8.5 billion by FY2027. Furthermore, SweetWater has approximately 4,000 points of sale across 27 states. Tilray can leverage on the strong distribution network to offer other products once cannabis is federally legalized.
Tilray also has a strong presence in Europe, which is another big market for cannabis. In Portugal, the company has an EU-GMP (European Union Good Manufacturing Practice) low-cost cultivation and production facility. The Portugal facility is used for exports to countries like Germany, United Kingdom, France, and Israel.
Additionally, the company is setting up an EU-GMP certified facility in Germany, which is a major market for medicinal cannabis. According to the company’s estimate, the European cannabis market size will be $3.9 billion by FY2025.
Tilray is well-positioned to be among the top players, considering its market reach. The company is targeting medicinal cannabis leadership in Europe, which is likely to succeed, given the focus on evidence-backed medicinal products. Additionally, the company already has a leadership position in Canada.
Another positive from the merger perspective is a potential reduction in cash burn. As a matter of fact, Aphria has already been EBITDA positive in the last six quarters. As revenue growth accelerates, the combined entity is well-positioned for healthy EBITDA and cash flow growth.
What Analysts are Saying About TLRY Stock
According to TipRanks’ analyst rating consensus, TLRY stock comes in as a Moderate Buy, with 4 Buy and 8 Hold ratings.
As for price targets, the average analyst price target is $22.73 per share, implying around 56.43% upside potential from current price levels. Analyst price targets range from a low of $17 per share to a high of $26.8 per share.
In the wake of the merger, Tilray has $454 million in cash. This gives the company financial flexibility for pursuing marketing and growth activities.
With a comprehensive portfolio of flowers, pre-rolls, vapes, beverage, and medicinal cannabis, Tilray is well positioned to be an industry performer.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.