Tilray (NASDAQ:TLRY) is about to become the biggest cannabis company in the world in terms of revenue, thanks to a merger with Canadian pot producer Aphria (NASDAQ:APHA). However, its stock performance has been rather lackluster lately, with a 73% decline from February highs. This has left investors wondering if there's hope for a turnaround. 

The problem with Tilray's stock was overvaluation. Less than two months ago, it was trading for nearly 40 times revenue. That wasn't an issue, as long as the company had the growth to show for it. However, after disappointing guidance by its soon-to-be subsidiary, Aphria, the stock price collapsed. Is the stock a safe bet for the long term? 

Landscape of a marijuana growth field.

Image source: Getty Images.

A temporary setback

During Q3 2021 (ended Feb. 28), Aphria grew its revenue by just 6.4% from the year-prior period to $153.6 million Canadian dollars. Simultaneously, its net loss increased by nearly fivefold to CA$47.9 million compared to last year's quarter.

The uninspiring results are mainly due to the return of provincial lockdowns in Canada and nationwide lockdowns in Germany. Since the two countries are falling behind the U.S. in terms of vaccinations, their governments have once again fallen back to strict measures like curfews to curb the spread of variant strains of the coronavirus. Over half of Aphria's sales come from sales of medical marijuana through its German CC Pharma subsidiary.

While that has undoubtedly hurt foot traffic to cannabis stores, that should rebound after public health measures are lifted. In the meantime, Aphria still maintained its position as the No. 1 producer of cannabis in Canada, with a 12% market share (17.3% when combined with Tilray). Additionally, its vape cartridges and cannabidiol (CBD) oil account for 18.8% and 13%, respectively, of all sales in those categories in the country.

Is the business still solid?

Last year, Tilray grew its revenue by 26% over 2019 to $210.5 million, driven by a 153% annual increase in its international medical marijuana sales. The company also narrowed its operating losses from $304 million in 2019 to $201 million. Tilray will likely suffer similar issues as Aphria in Q1, as much of its business still relies on the Canadian marijuana market for revenue. It will report earnings around early May.

Overall, finding ways to sustain the company's growth will be difficult in the future. Right now, the Canadian marijuana sector is pretty oversupplied, while Germany recently rejected legalizing recreational cannabis, so pot growers need to rely on the U.S. for expansion. There are currently 1.1 million kilograms of pot stockpiled by producers in Canada -- while the consumption rate stands at just 30,000 kg per month. So the oversupply issue probably won't be going away anytime soon.

Unfortunately, Aphria-Tilray's U.S. expansion efforts have led to lackluster results. Since the two are based in Canada, they can't yet export cannabis directly into the U.S. Last year, Aphria paid $300 million to acquire SweetWater Brewing as a venture into the craft beer industry (and potentially cannabis-infused beverages). In the three months leading up to Feb. 28, SweetWater generated CA$15.69 million in revenue and CA$1.016 million in earnings. At an annualized rate, those numbers are significantly lower than the $66.6 million in sales and $22 million in profits it brought in in 2019.

Tilray's U.S. subsidiary Manitoba Harvest isn't doing so well, either. In 2020, the hemp CBD grower's sales increased by 28% to $76.9 million, but that's largely because the numbers included 12 months of financial reporting compared to 10 months a year ago when it was acquired. Sales were actually down 18% year over year in Q4 2020.

What's the verdict?

The two companies don't have exposure to the lucrative tetrahydrocannabinol (THC) dispensaries in the U.S., so it's not hard to tell why they aren't increasing revenue as fast as U.S. pot players. On top of that are the short-term effects of lockdowns.

Overall, Tilray seems a little too expensive at 10 times price-to-sales (P/S) in exchange for a moderate-to-negligible growth forecast. I'd definitely wait until the company begins showing better sales improvements before buying the stock at current prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.