Here’s What Aphria Needs to Reward Investors With 41% Upside

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In focusing its efforts on two distinct segments of the cannabis market, Aphria (NYSE:APHA) has a good chance of carving a niche. It currently has its sights on the consumer packaging group and wellness arenas. It has to do this. And it has to be the leader.

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The monstrous inflow of money in the cannabis sector plunged in 2019, erasing Aphria’s 52-week peak above $10. Yet so far in 2020, the stock is holding the $4.50-$5.00 range and a market capitalization of $1.2 billion.

How have Aphria’s prospects improved in the last month? A cash infusion and recent quarterly results are two fundamentally positive developments.

On Jan. 24, 2020, Aphria received 100 million CAD when an institutional investor agreed to buy approximately 14 million shares at 7.12 CAD each. The purchaser gets a common share and a two-year warrant to buy half of a common share at 9.26 CAD. The minimal share dilution (7 million shares) is a relief for existing shareholders. The company gets a much-needed cash injection, which will quickly become more difficult for others to acquire this year.

Investor sentiment is no longer so optimistic for Aphria stock or competitors like Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON).

Aphria’s Strategy

Aphria believes it is in a good position to benefit from industry growth drivers. The conversion from illicit to legal requires the company to offer quality products at competitive prices. More importantly, its addressable market may expand as it awaits for pending U.S. legislation for cannabis. In the medical field, Aphria is spending small amounts on new research work. And when this research gets published, Aphria increases its chances of countries legalizing cannabis for medical use.

Investors now know that the cannabis market failed to grow in Canada. High legal product prices failed to compete with illegal cannabis. Still, Aphria posted positive adjusted EBITDA results in the last three quarters. It is selective in the brands and segments it pursues.

The Consumer Market

Aphria is segmenting its approach to winning customers. It is targeting four groups: the mainstream novices, mainstream urban culture, value enthusiasts and premium markets (the connoisseur). The company noted that its products won seven awards in 2019, including accolades like “top hybrid flower” and “top master grower.” Most importantly, the company formed two extensive distribution deals in Canada.

Its arrangement with Great North Distributors is a two-way exclusivity agreement. So, the tight manufacturer and customer interaction will give Aphria a distribution network that covers almost all of the Canadian population.

The distribution agreement with Shoppers Drug Mart (SDR) is highly noteworthy. This pharmacy has over 1,300 stores in Canada. SDR is owned by Loblaws, so it has the financial support to develop Aphria’s sales channels. As a result, Aphria may sell its products through the pharmacy chain’s e-commerce platform.

Aphria’s Growth in 2020

Despite Aphria stock getting stuck in a trading range, the company is growing rapidly in 2020. Its retail rollout is extensive. For example, it announced 151 store openings in British Columbia, Canada and 319 stores in Alberta, Canada. It already has 500 stores in the region and expects to grow to over 3,000 stores.

The “2.0” reference may prove too aggravating for investors. The idea denotes a promised land for immense growth. This growth is supposed to come from attractive derivative products, but investors might get spooked waiting for these products to roll out. But Aphria was on its game, and it started shipping recreational 2.0 products on Dec. 17. Its aim is ambitious as it goes after the vape market.

What is the potential 2.0 outcome? Aphria may earn 20%-30% of the vaping market share through successful partnerships with PAX Labs, its own Good Supply and Riff brands, and dosist.

My Takeaway on Aphria Stock

Aphria investors may assume the following metrics in a 5-year discounted cash flow revenue exit model:

Metrics Range Conclusion
Discount Rate 13%-15% 14%
Terminal Revenue Multiple 2x-3x 2.5x
Fair Value $4.01-$9.32 $6.57
Upside -13.9%-100% 41%

If revenue grows by at least 50% annually in that time period, the stock could be worth 41% more.

Aphria is a lower risk stock after erasing last year’s gains. Investors willing to hold the stock for at least three years should consider it at these levels.

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

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