Tilray Stock Looks Like a Tempting Buy Now After the Fall

Tilray (TLRY) stock fell 8 percent on July 14 and is now down 16.5 percent over the last month. Why is TLRY stock dropping and should you buy the dip in this marijuana stock?

Tilray and Aphria merged earlier this year to create the world’s largest company based on trailing pro forma revenues. However, Curaleaf reclaimed the top spot after it completed the acquisition of EMMAC Life Sciences.

There was a broad-based selling in all marijuana stocks on July 14, which also drove Tilray stock lower. Marijuana stocks have looked weak over the last month. The volatility isn't uncommon for the sector and it has gone through such boom-bust cycles several times.

From a company-specific perspective, there hasn’t been much negative news apart from the fact that TLRY has sought shareholder approval to increase the authorized share capital. Investors have been increasingly apprehensive of companies issuing shares. Recently, AMC Entertainment investors thwarted management’s proposal to issue another 25 million shares.

Tilray's stock forecast looks promising based on analysts’ ratings. It has an average target price of $20.69, which is a premium of almost 38 percent over the current prices. Of the nine analysts polled by TipRanks, five rate Tilray as a buy while four rate it as a hold or some equivalent.

Analysts' action has been very divergent over the last few months. In June, Alliance Global Partners lowered TLRY’s target price, while CIBC downgraded it from overweight to neutral. However, Cantor Fitzgerald upgraded the stock from neutral to outperform.

In May, Cowen and Canaccord Genuity initiated coverage on TLRY with a buy rating. Jefferies also double upgraded Tilray stock from underperform to buy and assigned a target price of $23.

Jefferies analyst Owen Bennett is optimistic about the Aphria-Tilray merger and called it the “perfect match.” He also referred to the company’s strong cost position and leading brands in Canada. He seemed bullish on the company’s prospects in Europe. “In Europe, the market is now picking up, while Tilray’s scale and Aphria’s unique German positioning make it perfectly suited to succeed,” Bennett said in his note.

Senate Majority Leader Chuck Schumer, New Jersey Senator Cory Booker, and Finance Chairman Ron Wyden introduced the Cannabis Administration and Opportunity Act in the Senate. If passed, it will allow adults in the U.S. to legally buy and possess up to 10 ounces of marijuana.

While the introduction of the bill should have led to a rise in marijuana stocks like Tilray, the opposite happened. The anomaly is possibly due to three reasons. First, Republicans don’t seem too favorable towards legalization. Second, White House Press Secretary Jen Psaki said that President Biden still doesn't support marijuana legalization. Finally, the proposals aren't as pathbreaking as the marijuana industry was hoping for.

Tilray is a good marijuana play and should recover its losses after the market sentiments improve. From a valuation perspective too, TLRY looks attractive with an NTM EV-to-sales multiple of around 9x.

The economies of scale and the post-merger synergies will also help narrow the company’s losses. The stock should recover soon and looks like a good buy at these prices.