The merger between two Canadian cannabis players Aphria and Tilray (TLRY -4.89%) was the highlight of the industry amid the pandemic. Aphria was already a strong pot company, and investors expected the merger with Tilray would form a cannabis powerhouse. A merger this big usually takes time to fully integrate, but Tilray is already on the right path. Since the completion of the merger in May 2021, the combined companies' quarterly results have been impressive. 

While most of the Canadian companies are struggling, Tilray might be the only Canadian pot stock to own in 2022. Let's take a look at why. 

The merger with Aphria proved beneficial

Before the merger, Aphria, under the leadership of CEO Irwin Simon, was already a strong profitable company. Tilray gave access to more markets. Though it could take a while for Tilray to fully reap the benefits of the merger, the company had already realized $70 million in cost synergies by Jan. 10.  Cost synergies are the cost reductions that a company achieves from a merger by taking advantage of each other's efficiencies. These efficiencies include high-class production facilities, competitive innovative products, growth strategies, the scale of operations, and more to generate higher sales.

Management believes Tilray will easily cross its original target of $80 million ahead of schedule and could also generate an additional $20 million in fiscal 2023. 

The merger with Tilray extended the company's horizons globally. Its cultivation facilities in Portugal and Germany will help it get deep in the European markets. 

Note that these cost synergies targets do not include revenue synergies (revenue to be generated from the combined company). With access to the global markets, the company might be able to continue generating higher revenues. 

Another impressive quarter

While popular names like Canopy Growth and Aurora Cannabis are struggling to grow revenue, Tilray impressed yet again with its fiscal second-quarter 2022 (ended Nov. 30) results. Its net revenue for the quarter increased 20% year over year to $155 million. Tilray entered the U.S market with the acquisition of craft beer maker SweetWater Brewing and hemp foods maker Manitoba Harvest. 

These acquisitions have contributed to its revenue in the second quarter. Management credited the following factors for adding to the total revenue surge:

  • 7% growth in cannabis revenue (medical and recreational) to $58.8 million from the year-ago period.
  • Net beverage alcohol revenue of $13.7 million from SweetWater. 
  • Wellness segment revenue (includes hemp foods and cannabidiol products) of $13.8 million from Manitoba Harvest.

Even though Tilray saw a 7% year-over-year dip in its distribution revenue to $69 million generated from its German subsidiary CC Pharma, it still contributed to 44% of total revenue. Despite having an old and strong presence in the Canadian medical cannabis market, Tilray generated just $7 million in sales from that market. However, the good news is its recreational segment flourished with $49 million in revenue for the quarter. The credit can be given to the high-margin derivatives products that Aphria launched last year. 

On the downside, Tilray reported a free cash flow of negative $16 million in the second quarter. Management stated the company couldn't generate positive free cash flow as it used up cash in operations, capital investments, and expenses related to acquisitions. However, 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. 

The only Canadian pot stock worth considering now

It would be a while for Canadian pot stocks to rebound. Unless they grow revenue at a drastic rate, it would be hard to achieve profitability any time this year. Moreover, most of them are focusing on expansion in the U.S. market, which could burden their balance sheet. Tilray, on the other hand, has been playing it smart. It strengthened its core operations and became profitable before advancing into the U.S. markets.

The company is well-positioned financially to take advantage of the opportunities in the rapidly evolving U.S. state cannabis markets. In December, it made another strategic acquisition of Colorado-based alcohol company Breckenridge Distillery. Talking about acquisitions in the U.S. market, CEO Irwin Simon said, "These significant, diversified revenue streams are key to delivering on our ultimate goal of industry leadership with $4 billion in revenue by the end of fiscal year 2024." 

Tilray ended its second quarter with a cash position of $332 million. However, if and when federal legalization happens, the domestic multistate operators will be the first to benefit. It could be a little challenging for Tilray as well. Analysts expect a 63% upside for Tilray's stock in the next 12 months.

That said, marijuana is still a risky sector, so my advice to investors would be to start with a small investment in Tilray with a mix of other growth stocks, and hold them for the long haul to earn fruitful returns.