Aphria (NYSE:APHA) stock hasn’t moved much over the last two months. As Aphria stock works to recover from last year’s implosion, analysts’ estimates for APHA are falling even though it landed a lucrative vaping deal. Although Aphria Inc still has not fully regained the confidence of investors, strong production numbers and a move into vapes and concentrates could help send Aphria stock higher.
APHA Is Still Recovering From Its 2018 Decline
Aphria stock continues to suffer the impact of last year’s swoon by APHA. The equity lost more than 75% of its value over three months last year as a short seller called Aphria Inc. a “shell game with a cannabis business on the side.” Many expressed doubts about the company’s Latin American acquisition, questioning the value of what it had obtained in the deal. This led to the departure of APHA’s founder and then-CEO, Vic Neufeld. Irwin Simon, the founder and former CEO of Hain Celestial (NASDAQ:HAIN), took over on an interim basis.
The effects of last year’s decline of Aphria stock linger. At around $7 per share, Aphria stock still trades almost 60% below its $16.86 per share high of last September. Also, unlike stocks such as Canopy Growth (NYSE:CGC), APHA stock did not regain its pre-Canada-legalization highs.
Aphria Stock Will Benefit From Higher Production Levels, Vapes
The collapse of APHA stock occurred despite the fact that Aphria Inc. became the third-largest cannabis producer in Canada, lagging only Aurora Cannabis (NYSE:ACB) and Canopy. Moreover, as dried cannabis falls in value, Aphria has partnered with Pax Labs to enable APHA’s cannabis to be used in Pax’s vaporizers. As InvestorPlace columnist Will Ashworth mentioned, vapes and concentrates help to diversify the company away from dried cannabis, whose prices continue to drop.
Vaping is mostly positive for Aphria stock. Although Pax will also work with Aurora, Organigram (NASDAQ:OGI), and Supreme Cannabis (OTCMKTS:SPRWF), some estimate that vapes and concentrates will take up to 30% of the recreational market by 2021. Moreover, since Aphria is the second-largest cannabis producer in this group, Aphria’s cannabis will be compatible with a significant percentage of Pax’s devices.
Aphria Stock Held Back by Uncertainty
However, I think two factors will hold back Aphria stock. First, analysts’ profit estimates for the company have fallen substantially over the last month. Three months ago, analysts forecast earnings per share of 38 Canadian cents Today, Wall Street analysts, on average, predict a loss of three Canadian cents per share.
One research firm, Canaccord Genuity, cut its price target on Aphria stock to C$16 from C$18 per share and also reduced its revenue and earnings estimates. It cited slower-than-expected capacity growth as the reason for the cuts.
The second concern involves leadership. The fact that Simon made the Pax deal despite his interim status highlights his ability. However, the company’s leadership situation remains uncertain. That uncertainty likely exacerbated the decline of Aphria last year.
But the price-sales ratio of Aphria stock is about 19. That compares well to the price-sales ratios of Canopy and Aurora, which are 80.8 and 61.8, respectively. Many believe questions about Aphria’s interim leadership have led to this lower multiple. Perhaps if the company could install a more permanent leadership team and somehow prevent earnings estimates for it from falling further, Aphria stock would reach its 52-week high or even move beyond that level.
Final Thoughts on Aphria Stock
Given APHA’s valuation and potential market share, Aphria stock should eventually overcome its challenges. Despite its new (interim) CEO, APHA is still 50% below its 52-week high. Though Simon landed the vaping deal, he remains interim CEO, creating questions about the future direction of the company. Moreover, revenue and profit estimates continue to fall as sales across the industry disappoint.
However, Aphria stock trades at a substantial discount to its larger peers, even as analysts’ revenue and profit estimates for APHA fall. That could turn around as traders begin to see sales numbers rise from the company’s sale of vapes, concentrates, and other products. Moreover, if APHA picks a permanent CEO, APHA could easily go from cheap for a reason to merely cheap.
As of this writing, Will Healy is long APHA stock. You can follow Will on Twitter at @HealyWriting.