This Pot Stock Just Turned Its First Profit—and Investors Are Going Crazy

APHA Stock Just Turned Its First Profit—and Investors Are Going Crazy
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APHA Stock Profit

The legal marijuana industry is transitioning from its growth phase into its profit phase as more and more markets open for business.

One of the many benefits of this transition is that the biggest fear of investors— that marijuana stocks are overvalued and won’t be making money any time soon—are assuaged. The result is that the top pot stocks will see big gains.

That’s exactly what’s happening with Aphria Inc (NYSE:APHA). Aphria stock jumped by more than 32% in after-market trading following an announcement on August 1 that the company became the first major Canadian pot producer to turn a net profit.

APHA stock soared after the company said it earned $15.8 million during its most recent quarter and posted revenue of $129.0 million. The revenue figure beat the highest analyst estimate, and was up 75% from the previous quarter. (Source: “Aphria becomes first Canadian pot company to turn a profit,” BNN Bloomberg, August 2, 2019.)

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Aphria sold 12,289 pounds (5,574 kilograms) of cannabis in the quarter, and the company’s revenue from recreational cannabis sales climbed to $18.5 million, up 158% from the prior quarter.

Another big metric that many investors value, cash cost per gram of dried cannabis (essentially production cost), fell from $1.48 to $1.35.

The company also predicts good things ahead. It’s projecting net revenue of $650.0 to $700.0 million in fiscal-year 2020, which ends May 31, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $88.0 to $95.0 million.

Analysts expect that Aphria will record revenue of $701.0 million and EBITDA of $46.0 million in the 2020 fiscal year.

“It’s a new day at Aphria. Our team’s solid execution across key areas of our business resulted in strong adult-use revenue growth and a profitable fourth quarter,” said interim CEO Irwin D. Simon. (Source: “Aphria Inc. Announces 158% Increase in Adult-Use Sales and Profitable Fourth Quarter,” Aphria Inc, August 1, 2019.)

He added,

Over the last six months, our organization identified immediate priorities to help generate substantial progress near-term and long-term. We built upon existing business fundamentals and capabilities, streamlined processes, strengthened governance, and focused on building brand awareness. Together, we have nurtured an entrepreneurial culture of accountability through data-driven decision-making for value creation in the global medical and adult-use cannabis industry. Today’s Aphria has a stronger foundation for long-term growth and success.

(Source: Ibid.)

This quarter was a massive departure from the previous one, which saw Aphria stock drop following a significant fall in gross margin and revenue that missed expectations.

Much of that was exacerbated by a $50.0-million write-down on Latin American assets, closing the chapter on what has been a tough period for Aphria. (Source: BNN Bloomberg, op. cit.)

Aphria was embroiled in a scandal of sorts wherein short sellers claimed that the company had misled investors about assets it had acquired and made those purchases to benefit specific individuals rather than the company.

But with that behind Aphria, its current situation represents a huge win. It’s something I had mentioned could be a possibility when I wrote about the company’s last quarterly report.

After all, single-quarter stock price dips can often be an opportunity; the price drops set up a possible recovery in the next quarter. That seems to be what’s taking place with APHA stock.

Now that Aphria Inc has proven it can turn a profit, and is one of the first legal pot companies to do so, expect to see several days of stock gains, potentially followed by a slight dip, depending on just how high the stock rises.

Furthermore, the Aphria stock forecast is bolstered by the fact that a marijuana stock correction has been taking place for the past few months.

With this major win, however, there’s a decent chance that the entire weed industry turns around because of Aphria’s good news. It has happened before, and this could be exactly the kind of injection of confidence that investors need.

I’m now quite bullish on Aphria stock and believe that, if the company can string together several quarters of profits—considering its current lower price due to the market correction and the company’s Latin America issues—then we could be witnessing the start of a very strong comeback.

What Profits Mean for the Top Pot Stocks

With Aphria Inc being the first major marijuana company to show a profit, this is a huge leap forward for the pot industry.

As I wrote above, much of the concern that some investors have (and something that the bears have been sounding off about for a while now) is that the marijuana industry is not guaranteed to be profitable any time soon.

This is a common derailment tactic, and sometimes it has merit.

For marijuana stock bulls, however, the easy response was that many of the largest companies in the recent past (especially in the tech sector) remained unprofitable for many years while growing, only to turn it all around in spectacular fashion when they were ready to transition into a profit-making stage.

Marijuana companies, evidently, are following a similar path.

While some companies are still figuring out whether it is time to proceed full-on toward profit or keep spending money in an attempt to foster growth, at the end of the day, the fact that a pot company was able to show a profit proves many of the bears wrong.

And the profits, in turn, help justify companies’ expenditures on growth.

Furthermore, it’s even better for the marijuana industry in that we’re seeing the profits following legalization in one fairly small market (Canada). When legal marijuana eventually expands to be a truly global market, those profits will grow, giving many investors confidence about the future of the industry.

Analyst Take

With Aphria Inc getting the first taste of profits in the legal cannabis industry, many marijuana investors are going to feel validated. After all, this is just the beginning of what the marijuana sector can deliver.

Aphria stock will likely become one of the stronger players in the pot stock market if the company can go on to record several profitable quarters.

Overall, Aphria’s news is fantastic for the cannabis sector, marking a new step for the industry as a whole.