In a cannabis sector that has done well in 2019, Aphria (NYSE:APHA) looks like a disappointment. The Aphria stock price has risen so far this year, gaining about 18%. But it’s been tough sledding for APHA stock since early February, when the stock briefly cleared $10.
Indeed, of the 13 cannabis stocks with market capitalizations above $1 billion, only one has underperformed APHA in the last three months: Tilray (NASDAQ:TLRY). Over that stretch, the Aphria stock price has slid by some 35%.
Meanwhile, the ETFMG Alternative Harvest ETF (NYSEArca:MJ) is off 5.7% in the same period. Aphria stock is the fund’s ninth-largest holding, comprising 3.96% of the the 39-pot stock portfolio.
Disappointing earnings certainly are a factor, as I wrote in mid-April. But the declines have continued even after the report. Between a short seller report last year, slowing growth, and management upheaval, there’s a sense that cannabis investors see easier ways to make money — and that they perhaps don’t truly trust Aphria anymore. For APHA stock to bounce back, that needs to change … and that might be tough.
New Management for Aphria
As InvestorPlace contributor Will Ashworth detailed last week, Aphria has overhauled its management team. The most recent casualty was president Jakob Ripshtein, who will depart on June 7. Former CEO Vic Neufeld and co-founder Cole Cacciavillani left in January — and APHA stock actually gained on the news.
Chairman Irwin Simon seems to be putting his stamp on the company. He’s taken the interim CEO spot, and added a new COO, Jim Meiers, who spent years working under Simon at organic and natural food producer Hain Celestial Group (NASDAQ:HAIN).
Any lingering worries about the Latin American transactions highlighted by the short report should be assuaged — at least somewhat. Aphria did write down those assets after the third quarter but had previously insisted (and still does insist) that the purchase price was acceptable.
Still, the company admitted past executives failed to disclosed their conflicts of interest. Shareholders, particularly in an industry that is so heavily regulated, likely benefit from a fresh slate. Aphria, at least, has given them that.
What Management Needs to Do
That said, the trading in APHA stock of late suggests investors don’t entirely trust the new management team, either. Aphria executives framed the disappointing Q3 as largely driven by temporary factors. Supply shortages and packaging challenges, in particular, presented headwinds to revenue.
Investors quite clearly didn’t buy that explanation, however, given that the Aphria stock price fell almost 15%. It dropped another 10% two days later when Aphria raised $300 million in convertible debt. Those are not reactions that suggest investors are completely on board with management.
And the same can be said of the declines since: the APHA stock price has fallen another 10%+. Multiples, at least relative to sales, look lower for APHA than for many pot peers. And the current valuation — a bit under $2 billion fully diluted, including debt — implies investors don’t trust a key target Simon laid out after Q3.
Is The Aphria Stock Price Really 2x Revenue?
On the Q3 call, Simon said that Aphria’s target was to hit $1 billion in annualized revenue by the end of calendar 2020. That would be about halfway through the company’s fiscal 2021, meaning fiscal 2022 sales almost certainly would be well past that $1 billion figure.
If Aphria is right, APHA stock right now is trading — again, including debt — at something like 1.8x FY22 sales. That is an absurdly low multiple for Canadian cannabis stocks space. Canopy Growth (NYSE:CGC) is valued at roughly 15x 2020 revenue, and probably at least 5x 2022 models. Other large marijuana stocks like Cronos Group (NASDAQ:CRON) and Aurora Cannabis (NYSE:ACB) similarly are receiving multiples of even out-year revenue estimates.
It’s important to remember, however, that this isn’t an apples-to-apples comparison. Most of Aphria’s seemingly stunning 600%+ year-over-year sales growth in Q3 came from an acquisition, as the company picked up German cannabis distributor CC Pharma.
Distributors generally have high revenue, but very low margins. Investors are not going to pay up for those sales but distribution revenue accounted for over three-quarters of Q3 revenue.
Still, the $1 billion target, based on current run rates, likely only includes $400 million or so in distribution sales. More broadly, it seems highly unlikely, barring a crash in pot stocks, that any issue in the category will trade at less than 2x revenue.
Management and APHA Stock
And so the APHA stock narrative seems relatively simple at the moment. If management is right, or close, Aphria stock is going to climb. Getting even close to the $1 billion target by the end of next year suggests upside.
But is management right? Q3 results, excluding the acquisition, look concerning. The valuation assigned the Latin American assets invites skepticism. Aphria still hasn’t really detailed why it needed to buy those assets or how they mesh with the broader strategy.
There are real questions here, and real reasons why APHA has underperformed. If Aphria can answer those questions, however, the performance of APHA stock could change in a hurry.
As of this writing, Vince Martin has no positions in any securities mentioned.