Canada-based medical cannabis and cannabinoid producer Tilray, Inc. (TLRY) has seen its stock price slump 41% over the past three months. This can be attributed primarily  to pessimism surrounding its  recently closed merger with Aphria, Inc. In fact, CIBC analyst John Zamparo has downgraded TLRY from Outperform to Neutral. According to Zamparo, although federal level legalization of marijuana could add fresh impetus to the stock, the uncertainty surrounding the passage of such legislation could be problematic for TLRY.

TLRY’s stock has gained 127.6% over the past year, driven by a surge of interest in the cannabis industry. However, the stock is currently trading at $17.98, which is 73.2% below its 52-week high of $67, indicating short-term bearishness.

Since the expected removal of the federal ban on marijuana is expected to be a long, drawn out process, TLRY could  face hurdles in its growth path. Furthermore, even as more states are legalizing recreational and medical cannabis, the Canadian operator’s entry into the U.S. market could face roadblocks given the competitive landscape.

Click here to check out our new  Cannabis Industry Report for 2021

Here is what we think could influence TLRY’s performance in the coming months:

Future of the Merger with Aphria Could Be Challenging

On May 3, TLRY and Aphria Inc. closed their merger,  thereby creating a highly complementary business combination that will  operate as Tilray. With a market cap of approximately $8.2 billion, the combined business plans to build a leading cannabis-focused consumer packaged goods company and create a multi-continent distribution network. However, given that both companies have so far been unprofitable in a crowded cannabis market, the future of the business remains uncertain.

Aphria reported a CAD$47.9 million ($39.32 million)  adjusted net loss in the third quarter of fiscal 2021, compared to its CAD$9.8 million ($8.04 million) adjusted net loss in the prior-year period. These weak financials could affect TLRY’s performance.

Uncertainty Associated with Federal Legalization

CIBC’s Zamparo  believes that the legalization of marijuana at the federal level is not going to help TLRY’s stock this year. Although Senator Chuck Schumer’s vow to introduce a bill to end the federal prohibition of cannabis soon has boded well for the stock so far, given that the chances of the bill being passed this year remain bleak, TLRY’s growth prospects are uncertain. And since the Senate’s stance on the bill is still unclear, the company may not benefit in the near term.

Weak Financials

TLRY’s trailing-12-month operating income came in at negative CAD$57.52 million (US$47.23 million). The company’s trailing-12-month interest income and trailing-12-month net income came in at negative CAD$2.65 million (US$2.18 million) and CAD$585.5 million (US$480.78 million), respectively. Also, TLRY incurred a CAD$500.03 million (US$410.60 million) trailing-12-month EBITDA loss.

In the first quarter, ended March 31, 2021, TLRY’s revenue declined 7.8% year-over-year to $48.02 million. It reported a $73.31 million operating loss , compared to a $71.25 million operating loss in the prior-year period. TLRY’s comprehensive loss came in at $337.20 million and its net loss per share came in at $2.01.

Unfavorable POWR Ratings

TLRY has an overall D rating of D, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. TLRY has a D Sentiment Grade. This is justified given that analysts are bearish on the stock.

In terms of Growth Grade, TLRY has a C, in sync with the company’s inadequate growth prospects.

Also, it has a D grade for Momentum, which is consistent with the stock’s negative returns over the past three months.

Click here to see the additional POWR Ratings for TLRY (Stability, Value, and Quality).

TLRY is ranked #193 of 229 stocks in the F-rated Medical – Pharmaceuticals industry.

There are several top-rated stocks in the same industry. Click here to access them.

Bottom Line

Analysts expect TLRY’s EPS to decline 50% in the next quarter, ending  September 2021. Also, the stock has recently been downgraded because of uncertainties related to the federal level legalization of marijuana. Furthermore, future risks associated with its merger with Aphria could hold the stock back. So, we think it could be wise to avoid the stock now.

Click here to check out our new  Cannabis Industry Report for 2021

TLRY shares fell $0.21 (-1.17%) in premarket trading Wednesday. Year-to-date, TLRY has gained 115.38%, versus a 13.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

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. More...

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