The merger between two Canadian cannabis players was the highlight of the industry. The merger of Aphria and Tilray was expected to form a cannabis powerhouse. Tilray is on the right path after a big merger. The combined companies have had impressive quarterly results since the merger.
Tilray might be the only Canadian pot stock to own in 2022. Let's take a look at why.
Aphria was already a profitable company before the merger. Tilray gave access to more markets. Tilray realized $70 million in cost synergies by January 10th, despite it taking a while for them to reap the benefits of the merger. High-class production facilities, competitive innovative products, growth strategies, scale of operations, and more are some of the efficiencies.
Tilray will easily cross its original target of $80 million ahead of schedule and could also generate an additional $20 million, according to management.
The merger with Tilray extended the company's horizon around the world. Its facilities in Portugal and Germany will help it penetrate the European markets.
Revenue synergies are not included in the cost synergies targets. With access to the global markets, the company might be able to continue generating higher revenues.
Tilray has excelled with its fiscal second-quarter results, despite popular names like Canopy Growth and Aurora Cannabis struggling to grow revenue. The company's net revenue increased 20% year over year. Tilray entered the U.S market with the acquisition of three companies.
The acquisitions contributed to the revenue surge in the second quarter.
Even though Tilray's distribution revenue fell by 7%, it still contributed to 42% of the company's total revenue. Tilray generated just $7 million in sales from the Canadian medical cannabis market, despite having a strong presence there. The good news is that the recreational segment had $49 million in revenue for the quarter. Aphria launched high-margin derivatives products last year.
Tilray had a negative free cash flow of $16 million in the second quarter. The company couldn't generate positive free cash flow as it used up cash in operations, capital investments and expenses related to acquisitions. Tilray's CFO assured in the Q2 fiscal 2022 earnings call that achieving free cash flow on a consistent basis is a priority for the company.
Canadian pot stocks would take a long time to rebound. It would be hard to achieve profitability this year unless they grow revenue at a rapid rate. Most of them are focused on expansion in the U.S. market, which could burden their balance sheet. Tilray has been playing it smart. Before entering the U.S. markets, it strengthened its core operations and became profitable.
The company is well-equipped to take advantage of the opportunities in the rapidly evolving U.S. state cannabis markets. In December, it made another acquisition. The CEO said that acquisitions in the U.S. market are key to delivering on the goal of $4 billion in revenue by the end of the fiscal year.
Tilray had a cash position of $332 million at the end of the second quarter. If federal legalization happens, the domestic multistate operators will be the first to benefit. It could be a challenge for Tilray as well. Tilray's stock is expected to rise in the next year.
My advice to investors is to start with a small investment in Tilray and hold them for the long haul, as marijuana is still a risky sector.
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