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Aphria Stock Will Take a Long Time to Dig out of Its Hole

Pot stocks are struggling, and Aphria (NYSE:APHA) is no exception. At one point in February, the Aphria stock price had risen 90% in 2019. APHA stock now has given all of those gains back.

Aphria Stock Will Take a Long Time to Dig out of Its Hole

Source: Shutterstock

With fiscal Q4 earnings arriving on Thursday afternoon, APHA shareholders likely are hoping for a reversal. I’d be skeptical that’s on the way. Aphria, as I wrote in May, has a clear trust problem with investors. The sector on the whole is struggling, and there’s not much reason to see outperformance in either of the company’s two key end markets.

Meanwhile, Aphria stock, like other cannabis stocks, might be cheaper, but it’s not cheap. Quite a bit of growth remains priced in. I’m skeptical Aphria can deliver quite enough of that growth on Thursday.

Cannabis Earnings Haven’t Been Good Enough

It’s not just the owners of APHA stock who will be watching Aphria earnings closely. The sector on the whole needs a win, and it hasn’t had one in a while.

The most valuable cannabis company, Canopy Growth (NYSE:CGC) posted soft earnings late last month. Hexo (NYSE:HEXO) disappointed with its fiscal Q3 report two weeks earlier. Cronos (NASDAQ:CRON) dipped after its release in May. Aurora Cannabis (NYSE:ACB) and Tilray (NASDAQ:TLRY) similarly posted numbers that investors didn’t see as particularly bullish. As a result, most stocks in the sector have been in a steady downtrend for several months now.

Expectations simply have been too high. That may be the case again ahead of Aphria’s fourth quarter. The consensus estimate suggests 2% quarter-over-quarter revenue growth. That doesn’t sound like much for Aphria to generate. But it actually could be a bit more difficult than it sounds.

Canada, Germany and APHA Stock

Right now, Aphria’s revenue depends on two key markets: Canada and Germany. In Canada, retail sales have stalled out after an initial post-legalization pop. Multiple producers have cited enormous backlogs at Health Canada, the industry’s regulator, in approving edibles and other ancillary products.

Meanwhile, roughly 75% of third-quarter revenue came from Germany, thanks to the company’s acquisition of distributor CC Pharma. But most of CC Pharma’s sales don’t even come from cannabis but rather pharmaceuticals. It’s not clear yet how much growth investors are pricing in – and it’s even less clear how much credit investors might give Aphria for that growth.

CC is an exceedingly low-margin business, as most distributors are. And, again, that category isn’t yet focused on cannabis anyway. Investors in marijuana stocks like Aphria stock aren’t really interested in the current sales from CC. The opportunity there is in making that distributor a leader in medical marijuana as that industry grows.

And so there’s a potentially difficult split in terms of what Aphria’s fourth-quarter revenue will look like. Much of the revenue is coming from the distribution business, which investors don’t value very highly.

Indeed, Aphria only paid less than $30 million in cash for the business, with a roughly $25 million earn-out payment if the business performs well. The current APHA stock price of $5.33 suggests a market cap still above $1.3 billion.

The rest of the sales is where investor focus likely will be – but that revenue has clear headwinds to growth. Particularly in the context of disappointing results from peers, it’s difficult to be too excited about a top-line ‘beat’ on Thursday.

The $1 Billion Target for Aphria Stock

There is one goalpost investors should watch in the quarter, however. On the Q3 conference call, interim CEO Irwin Simon said the goal was for Aphria to hit $1 billion in annualized revenue by the end of calendar year 2020. I noted in May that investors clearly didn’t trust the goal. The continued weakening of the APHA stock price suggests that still is the case.

It will be important, then, to see if Simon and Aphria decide to walk back that target at all. If they do, it could be a sign that the company is resetting expectations to a more rational level, perhaps one which the company can outperform.

If they don’t, the skepticism toward Aphria stock might get even stronger. The company’s response to questions surrounding its acquisition of assets in Latin America has left some investors unconvinced. Aphria wrote down the acquisitions almost immediately after the deals closed, while insisting the prices paid were acceptable.

Simon is part of a changing of the guard in management. The jury remains out on whether that shift is a good thing.

All told, Q4 looks like a reasonably important quarter for Aphria. Again, it’s not necessarily that the company needs to beat estimates, though a strong quarter from somebody in the cannabis sector likely would lead to at least a relief rally. Rather, this is a company that’s lost investor confidence. It has an opportunity on Thursday to get some of it back.

The worry is that’s been the case for several cannabis companies over the past few months. Few, if any, have succeeded. I don’t see enough evidence right now as to whether Aphria will be any different.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/aphria-stock-out-of-its-hole/.

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