Aphria Stock May be Priced Right, But Can it Grow?

Stocks to sell

Cannabis companies have seen their stock prices go up in a puff of smoke in 2019. Investors have grown weary of waiting on profits. Which makes the current decline in Aphria (NYSE:APHA) stock a little bemusing.

While Aphria stock is interesting, the cannabis industry’s volatility makes this a risky play.

In its most recent earnings report, APHA actually recorded a profit, albeit a slight one. The company reported positive earnings per share of 7 cents. This was 10 cents above the Thomson Reuters consensus estimate for a negative EPS of 3 cents. Revenue came in below estimates at $126.10 as opposed to $131.15. However, the company’s revenue was 848.1% higher on a year-over-year basis.

This did not seem to alter the anti-cannabis sentiment with investors. After getting a brief lift from the report, Aphria stock has fallen over 18%, hitting a 52-week low. APHA stock has since moved solidly off that low. Given APHA’s current share price, I’m not that concerned about a downside risk. My question is, if profits are being so easily dismissed, what is the ceiling for APHA stock?

Aphria Is Cleaning Up Its Balance Sheet

Aphria recently made news by selling 37 million shares of Althea Group Holding Ltd in Australia. That would divest the company of nearly 85% of its stake in the company. By selling its majority stake, Aphria is demonstrating a willingness to reign in expansion to focus on key markets (notably North America).

Good news for the balance sheet can also help the company put further distance between it and a couple of questionable acquisitions that caused its stock to plummet in the summer. But will cleaning up its balance sheet be enough?

APHA Is Swimming Against the CBD Current

The conventional wisdom holds that cannabidiol (CBD)-based products (i.e., the non-addictive kind) will be the tip of the spear that leads to full legalization of cannabis. Aphria is committed to selling marijuana products that contain tetrahydrocannabinol (THC). This is the compound that creates the “high” from marijuana.

However, InvestorPlace’s Josh Enomoto recently wrote that, in at least one study, THC delivered a higher therapeutic benefit than CBD (albeit with more side effects). The study was far from conclusive and waving the flag for THC while the industry is embracing CBD (albeit perhaps out of expediency) puts some risk into Aphria stock.

Although, on the surface, the cannabis industry has a lot of companies that look the same. If Aphria can carve out a niche with THC in medical marijuana, it would offer investors something distinct.

What Good Is More Supply if Demand Remains Weak?

Aphria just obtained a long-awaited cultivation license for its Aphria Diamond facility. This acquisition will double Aphria’s production space to 2,400,000 square feet. And it will expand their capacity to 255,000 kilograms. Putting the increased space aside, the facility features “industry-scale” automation that allows APHA to lower their production costs and increase their margins.

But investors have heard the “more capacity” argument from bigger cannabis companies like Canopy Growth (NYSE:CGC) and Aurora Cannabis (NYSE:ACB). The reality is that the market is oversupplied for the needs of the one market (Canada) in which cannabis is fully legal.

Although cannabis can be legally sold throughout the country, it can only be sold in government-regulated stores. And each province has different rules regarding where, and how many stores will be allowed to sell. Most provinces are allowing online sales for Canadian residents or for travelers to receive while they are in Canada.

There Remain a Lot of Unknowns for Aphria Stock

Nine Wall Street analysts have given Aphria stock a consensus one-year price estimate of $12.12. The forecasts ranged from $6.50 to $22.75. The consensus rating for the stock is a buy. By cutting back on its global investments and expanding its production capabilities, Aphria is doing a good job of controlling the “controllables.”

However, the cannabis industry is fraught with unknowns. There’s a lot of hope. There’s still a lot of potential. But investors are in the “fool me twice, shame on me” mode. And that makes it hard to define a ceiling for Aphria stock.

I like the cannabis sector in the long term, and I think that Aphria stock has seen a drop in price that is not justified by the fundamentals. I can see where Aphria could be a very good value at its current price. But like many investors, I need to see the sales. Until I do, it’s hard to recommend Aphria stock.

As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.

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