Remember how exciting it was when Canadian company Tilray (NASDAQ:TLRY)bought out competitor Aphria? At the time, it was the cannabis-market merger of a lifetime. TLRY stock was supposed to soar to all-time highs.

However, people’s pot stock dreams met reality and went up in smoke. Even with Aphria’s assets, Tilray still hasn’t been able to turn the tide of Wall Street sentiment.

Taking a closer look at what Tilray has been up to lately, we can make a persuasive argument that TLRY stock is severely undervalued.

Knowing this, contrarian investors might start accumulating shares. But hold your horses.

There’s a fresh bulletin that’s bound to change the equation and when all is said and done, it could force prospective investors to reevaluate their strategies.

A Closer Look at TLRY Stock

A year ago, when it seemed as if TLRY stock was destined to break through $30, it felt as if the sky was the limit.

Those were good times, weren’t they? We should however bear in mind that early 2021 was a time when meme stock traders were pushing all sorts of downtrodden stocks to short-term highs. After a while, many of these social media traders simply abandoned their chosen stocks and let the share prices fall back down to earth.

Over the past year, the air has gradually let out of the balloon and TLRY stock has declined below the crucial $10 level. In recent days, the stock has even approached $5.

That’s significant for one very simple reason: $5 is the threshold for consideration as a penny stock.

If TLRY stock enters into Penny Stock Land, that’s going to deal a serious psychological blow to the shareholders. So investors need to monitor the $5 area carefully, as it will quickly turn into a battle zone between the buyers and sellers.

Thriving or Diving?

Before we get into the game-changing news that has cannabis stock investors all fired up, let’s check in on Tilray’s business operations.

All in all, it appears that the company is doing quite well. Tilray’s most recent earnings report, which covers the second quarter of fiscal year 2022, was actually quite impressive.

The biggest highlight from those results was the fact that Tilray has swung to profitability. Specifically, the company’s net income totaled $6 million, a stark contrast to the net loss of $89 million reported in the prior-year quarter.

Moreover, Tilray’s net revenue increased by roughly 20% year-over-year to $155 million during 2022’s second fiscal quarter. So the company is actually thriving, despite the fact TLRY stock is diving.

The Big Deal

Now, without further ado, let’s get to the 800-pound gorilla in the room. In case you didn’t get the memo, Tilray has agreed to engage in a financial partnership with rival cannabis company Hexo (NASDAQ:HEXO).

“Financial partnership” is promotional speak that translates to Tilray buying up to $211 million of Hexo’s senior secured convertible notes. That’s a fancy way of saying Tilray will acquire a huge amount of Hexo’s debt.

Apparently, this will provide Tilray with approximately 20 million CAD in interest payments in the first year. That’s fine for Tilray, but probably not so great for Hexo.

And what’s bad for Hexo is now bad for Tilray. Since Tilray will now have a large stake in Hexo, TLRY stockholders are effectively investing in both companies.

This might not be positive news for Tilray’s investors. InvestorPlace contributor William White recently provided a deeper look at Hexo’s most recently released quarterly earnings report.

You should read White’s article before considering a position in Tilray and Hexo. Evidently, Hexo’s quarterly revenue of $39.9 million was a disappointment to Wall Street as well as to some investors.

The Bottom Line

It’s fine if you want to go bottom fishing with TLRY stock. Just be aware that you’re also indirectly taking a stake in Hexo.

Don’t get the wrong idea. Tilray, on its own, appears to be doing well. It’s great news that the company recently swung to profitability.

Nevertheless, it would be hasty to jump into the trade with TLRY stock now. It’s wise to see how Tilray’s investment in Hexo pans out, then revisit and reassess the situation.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.