Aphria Stock Could Deliver Big Returns
If you are a pot stock investor, you might have mixed feelings at the moment. The outlook for the industry is undoubtedly bright, but shares are often volatile. It doesn’t help that the market is very turbulent at the moment.
Therefore, instead of chasing the hottest tickers right now, it is probably a better idea to consider pot companies that have solid fundamentals, like Aphria Inc (NASDAQ:APHA).
Headquartered in Leamington, Ontario, Aphria is one of the major players in the Canadian cannabis industry. Canada legalized recreational marijuana in October 2018, and Aphria managed to capitalize on the new market very quickly.
The company offers several brands, ranging from value to premium. Last year, Aphria’s brands won seven awards at the Canadian Cannabis Awards. (Source: “Company Presentation July 2020,” Aphria Inc, last accessed August 7, 2020.)
Aphria has also partnered with leading distributors.
In particular, it has a two-way exclusivity agreement with Great North Distributors (a Canadian subsidiary of Southern Glazer’s Wine & Spirits, LLC) for recreational cannabis product distribution throughout Canada. Great North Distributors’ extensive distribution network covers 99.8% of the country’s population.
Aphria Inc also has a medical cannabis business, and it was the first licensed pot producer to partner with Shoppers Drug Mart, which is by far the biggest pharmacy chain in Canada.
With that partnership, patients can find Aphria’s products through Shoppers’ e-commerce platform. Better yet, there’s potential for Aphria’s products to be dispensed in the pharmacy chain’s numerous physical stores throughout Canada.
One major event after pot became legal for recreational use in Canada in 2018 was the legalization of cannabis extracts, including vaping products, on October 17, 2019. Aphria was quick to capture that opportunity, too.
According to data from the Ontario Cannabis Store, Aphria Inc’s vape products had a 29.3% market share in Ontario, the most populous province in Canada. With vape products projected to account for 20% to 30% of recreational pot sales in the country, being a leading player in the segment at an early stage should benefit Aphria’s business in the long term.
Over the past several months, many pot stock investors have been wondering how the industry would handle the impact from the COVID-19 pandemic. Since Aphria recently reported earnings, let’s take a look at its financials.
In the fourth quarter of Aphria’s fiscal-year 2020, which ended May 31, the company generated CA$152.2 million of net revenue, which represented an 18% increase year-over-year and a five percent increase sequentially. (Source: “Aphria Inc. Announces Fourth Quarter and Fiscal Year 2020 Results,” Aphria Inc, July 29, 2020.)
During the quarter, Aphria managed to lower its cash cost to produce one gram of dried cannabis by five percent to CA$0.88. However, the all-in cost of goods sold stayed flat at CA$1.69 per gram.
Notably, Aphria Inc generated adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of CA$8.6 million in the fourth fiscal quarter, a whopping 49% increase sequentially. This marked the fifth consecutive quarter that the pot company has churned out positive adjusted EBITDA.
Still, it was not all sunshine and rainbows. For the reporting quarter, Aphria had a net loss of CA$98.8 million, or CA$0.39 per share, compared to a net income of CA$5.7 million, or CA$0.02 per share, in the prior quarter.
However, the bulk of that net loss came from a non-cash impairment of CA$64.0 million, which was “largely attributable to measures taken with respect to certain of the Company’s international businesses in response to the COVID-19 pandemic.” (Source: Ibid.)
Aphria Inc (NASDAQ:APHA) Stock Chart
Chart courtesy of StockCharts.com
As I said earlier, pot stocks are very volatile. Just take a look at the Aphria stock chart and you’ll see what I mean.
Speaking of charts, in July, the 50-day moving average of APHA stock crossed above its 200-day moving average. In technical analysis, that’s called a “golden cross” pattern, indicating that the trend is shifting upward.
More recently though, the stock has come down a bit, and is almost touching the 50-day moving average, which often acts as a support level. If Aphria stock bounces off that support level, we could see it continue on an uptrend.
Bottom line: Aphria Inc has a solid business and has remained quite resilient during the COVID-19 pandemic. Short-term volatility aside, I can see APHA stock delivering big returns to investors in the long run.