Stock of the week - Tilray (18.02.2021)

• Tilray gained over 200% year-to-date

• Company released solid Q4 earnings report

• Positive quarterly EBITDA for the first time

• Merger with Aphria expected to close in Q2 2021

• Stock has been very volatile recently

Tilray (TLRY.US), the Canadian cannabis company trading on the US stock exchange, is making big moves in pre-market today. Company reported the first quarterly EBITDA profit when it released Q4 earnings yesterday after the session closed. In our short analysis we will take a look at the company's results, M&A plans and recent price action.

Earnings

Tilray reported 21% YoY higher revenue of $56.6 million in Q4 2020, slightly above market consensus of $55.5 million. More importantly, Tilray reported EBITDA of $2.2 million, the first positive quarterly EBITDA in its history. Market expected EBITDA to reach $0.2 million. Nevertheless, the company missed expectations when it came to other profitability measures. Net loss at $46 million was deeper than a loss of $19.6 million expected. Company also reported a lower-than-expected gross margin at 29.4% (exp. 35.2%). 

Cannabis sales increased 46% YoY to $41.2 million, driven by strong medical sales in the international markets (+191% YoY) as well as solid performance of recreational sales in Canada (+49% YoY). Hemp product sales dropped 20% YoY to $15.3 million. Company sold a total of 6,901 kilogram equivalents of cannabis marking a 54% YoY decline that was offset by higher prices.

Merger with Aphria

Tilray announced in mid-December 2020 that it intends to merge with Aphria (APHA.US), another Canadian cannabis company. The merger will create the biggest company in the world and is expected to close in Q2 2021. According to Tilray CEO, the combined entity will have the lowest cost of production among cannabis companies and can count on pre-tax synergies of almost $80 million. New company will be led by Irwin Simon, chairman and CEO of Aphria.

Aphria has slightly broader international presence than Tilray and better market share in the domestic market. Tilray has around 4% market share in Canada while Aphria has 12%. Aphria has medical cannabis operations in Canada, South America, Africa, Oceania and Europe while Tilray has operations in Canada, Latin America, Oceania and Europe. There are also some differences between companies when it comes to cannabis derivatives as Aphria expanded into vape products while Tilray focused on cannabis-infused edibles. Nevertheless, such differences are desired in case of a merger.

As one can see on the chart above, Aphria has much bigger sales than Tilray. A big jump in Aphria's Q1 2019 revenue reflects that first quarter of legal recreational cannabis in Canada and shows that Aphria adapted to the new legal environment much quicker than Tilray as Tilray experienced a jump in Q2 2019. Source: Bloomberg, XTB

Retail frenzy

Tilray's shares have been very volatile at the beginning of February 2020 as an army of retail traders from Reddit took it as an aim after the GameStop fiasco. Nevertheless much of those abnormal gains have been erased already. A point to note is that the Reddit-driven rally in Tilray was more justified than in the case of GameStop as Tilray's operations are improving and merger with Aphria is seen as an opportunity. Moreover, traders have been betting on cannabis companies following US elections as Democrat win makes it more likely for cannabis to be legalized in the United States on a federal level. On one hand, it will make the massive US market more open for companies like Tilray or Aphria. On the other, competition from the domestic US companies is likely to surface quickly.

Shares of Tilray (TLRY.US) rallied to as high as $65 amid Reddit-driven retail frenzy. This rally has lost steam however and stock pulled back to the $30s. Tilray's earnings were well received by the markets at the beginning, rising as much as 15% at one point during the US after-hours trading yesterday. Nevertheless, current pre-market quotes point to stock opening in the $32.45 area - around 3% above yesterday' close. A look at the H4 chart shows that the nearest support can be found at 50-period EMA (currently at $30) while the near-term resistance is marked with the intraday swing level at $36.40. Source: xStation5