Aphria (NYSE:APHA) is slated to report its fiscal second-quarter earnings on Friday morning. Few reports in my recent memory – for any stock, not just Aphria stock – have been more important.
The numbers alone could have a huge impact on APHA stock. The marijuana sector is still in its early stages. Every company in the space is growing exponentially, off of small bases. APHA needs to keep pace with its competitors, particularly as its rivals like Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC) receive multi-billion-dollar cash infusions from larger players.
But the results, as important as they are, might be the least important aspect of the Q2 report. The company still hasn’t responded to short-seller allegations, made over a month ago, that tanked Aphria stock. And it’s facing a hostile takeover effort from new – and smaller – marijuana producer Green Growth Brands (OTCQB:GGBXF).
All told, there will be a lot of information to analyze on Friday, and Aphria stock is likely to be volatile on that day and going forward. I called Aphria’s earnings one of three key reports to watch this week, but that understates the case. This almost certainly is the most important report in Aphria’s history, and it might be the most important report in the history of the entire pot sector.
The Short Sellers of Aphria Stock
In early December, Hindenburg Investment Research and Quintessential Capital Management published an article alleging “that Aphria’s acquisitions of assets in Latin America constituted “‘self-dealing.'” Aphria stock had fallen ahead of the report, due in part to sector-wide weakness, but it dropped even further on the release. At one point, Aphria stock fell 50% below its previous value.
Aphria stock has recovered some of its losses, and there has been some good news on the Latin American front, as a Bloomberg reporter toured some of Aphria’s assets last month in Jamaica and Latin America and highlighted “plastic tubs brimming with medical-grade marijuana.” As a result, the assertion that Aphria’s overseas operations are worthless and/or a fraud seems to have been weakened.
But investors no doubt are waiting for more color on the value of those assets and the prices that APHA paid for them. In other words, they want the company to – per a promise that it previously made – issue a more detailed rebuttal than it released in the wake of the short sellers’ report. It’s possible that APHA’s more comprehensive response will be issued on Friday or that at least the issue will be discussed in detail during the company’s earnings conference call.
How management addresses these claims will not just be important for APHA stock. Investors in CRON, CGC, Aurora Cannabis (NYSE:ACB), Tilray (NASDAQ:TLRY), and every other pot stock need to pay close attention to this issue as well.
This is a new sector, and a number of pot companies have inexperienced managers and are or were listed on the pink sheets. So the space still needs more credibility. Aphria can add to the sector’s credibility or undermine it.
The Buyout Offer
Aphria’s credibility is important not just for retail investors, but because its integrity could help determine whether additional big players decide to enter the sector. After Altria (NYSE:MO) and Constellation Brands (NYSE:STZ,STZ.B) invested in cannabis companies, investors began wondering who would be the next target.
Luke Lango argued that it would be Aphria. But that won’t happen if Aphria’s management can’t fully dispel the allegations regarding its acquisitions. And in the meantime, Aphria has another offer on its hands from Green Growth.
As Lango pointed out, the offer itself doesn’t seem to make a lot of sense. But it will be interesting to see how Aphria’s management reacts to the offer.
Will APHA let slip that it might be interested in another offer from, say, a company with more history and more cash than Green Growth? And how is APHA managing the potential distraction from the hostile bid, which could further dissuade more viable potential acquirers from making an offer, at least in the short term?
APHA won’t announce on Friday that it has accepted Green Growth’s offer. But how the company reacts to the bid will impact investors’ appraisal of the credibility of APHA’s management.
Finally, there are the actual results. And those will be an important driver of Aphria stock, too. Aphria’s revenue more than doubled in its fiscal first quarter. After Canada legalized pot in October, investors will be looking for more of the same.
Profits aren’t all that important: Aphria’s EBITDA, which was previously positive, has become negative as it invests more in its business, and that shift makes sense. In a competitive market – particularly with giants now backing two of Aphria’s potential competitors – market share will be the key factor in the near-term.
Can APHA show that it’s one of the market leaders? That’s the question from a fundamental standpoint. But it’s also the question from a management standpoint.
Is this a real company that can create real profits for owners of Aphria stock? That’s the question investors in APHA stock – and every other marijuana play – are trying to figure out right now. The information released on Friday will have a huge impact on how investors in Aphria stock answer that question in the coming months.
As of this writing, Vince Martin has no positions in any securities mentioned.