Ever since its production ramp announcement during its last earnings report, shares of Aphria (NYSE:APHA) drifted lower. The cannabis market is out of favor, taking the once favored pot stocks with it. Aphria is no exception to the negativity surrounding the sector. Yet the company operates primarily in the medical cannabis market. Even if cannabis prices fall or the sector suffers from supply constraints, I belive there is still going to be a future need for cannabis products in the medical market.
Aphria Stock Surges After Strong Production in the Fourth Quarter
Immediately following earnings, Aphria stock spike above $7.00, but the stock has since fallen. On the conference call, the company said it planted more than 200,000 plants in the newly expanded area of Aphria. At the end of the week of August 2, the facility was fully planted with over 500,000 plants. Plus, yields rose, quality improved and costs fell. The company lowered its packaging materials costs after installing a packaging automation tool.
At Aphria Diamond, the 100-acre second campus had 1.3 million square feet of greenhouse production. Still, it is waiting on Health Canada licensing approval and hopes to get that soon. Once it is fully licensed, total annual production capacity in Canada will expand to 255,000 kilos. And because Health Canada is prioritizing the review of outdoor grow, this will allow for plantings this calendar year.
Aphria boasts presence in more than 10 countries across five continents. It has five high-quality brands to market. Even though Aphrira’s brand is synonymous with medical cannabis, the legalization of vapes and concentrates is the catalyst for growth in the Canadian market. Aphria forecasts these markets representing around 30% of the Canadian adult-use market by 2021.
Germany has granted the company the maximum number of allowed lots for cultivation of marijuana. It is the only producer in the country with permission to grow all three legal strains of medical cannabis. Also, it will introduce a CBD-based nutraceutical product line in Germany. With 13,000 pharmacies throughout Germany, Aphria’s subsidiary, CC Pharma, has a wide addressable market and no competition.
The company is growing rapidly in Latin America through its LATAM acquisition. Columbia is another market it will start developing. Through a partnership with the Columbia Medical Federation, Aphria may become a leader in medical cannabis sales.
The U.S. Still the Important Market
Ahead of legalization of medical cannabis in the U.S., Aphria has plenty of plans for developing its market. But it cannot do anything yet. For now, it is planning partnerships, acquisitions, and strategic alliances. It also has the discipline in only entering markets that are potentially profitable. Now that markets are intolerant over firms losing more money as it grows sales, Aphria will spend its efforts carefully.
Investing in Aphria is ultimately a bullish bet that premium products will have healthy demand. The company did not yet announce exactly which products it will launch and where. Management continues to have internal discussions, analyzing consumer demand. Once capacity increases, Aphria will have more opportunities to build a market, grow its brand, and enjoy higher margins.
Investors may model a perpetuity growth rate of 4% in a 10-year DCF Growth exit model on finbox.io. With a conservative discount rate of 12%-13%, APHA stock has a fair value in the range of $6.29 – $7.82. At a recent closing price of $6.22, Aphria stock has an upside of almost 10%. That is the base case scenario. If investors model double-digit growth for the next 10 years, then the stock’s fair value is somewhere in the $10 range and above.
Analysts who offer a one-year price target on Aphria have a $10 target price. This is ~61% above the current price. An intrinsic value based on future cash flow model from simplywall.st suggests an even higher value of $29.35. In this scenario, the model assumes an 80% annual growth rate in earnings.
Your Takeaway on Aphria Stock
Cannabis stocks are out of favor right now but sentiment might reverse at any time. Predicting when that happens is impossible. Investors may want to start a position and wait for Aphria stock to report profits and growing revenue.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.