My philosophy on pot stocks has been very simple. The global cannabis market will be huge one day — current favorable consumption, perception, and legislation trends imply as much. But there are lot of pot stocks out there today. History tells us that only a few will survive and thrive with the global cannabis market in the long run. As such, while bullishness on the whole cannabis space is warranted, investors should only buy the highest quality pot stocks. Enter, Aphria (NYSE:APHA) stock.
For a long time, APHA stock didn’t make the cut. This was just another, largely undifferentiated Canadian cannabis company that looked more likely to go bust than boom in the long run. APHA stock consequently found itself in a multi-month downtrend from $17 in September 2018, to $5 by August 2019.
Then, Aphria reported fourth-quarter numbers in early August. Those numbers changed everything.
Now, Aphria is much more than just another, largely undifferentiated Canadian cannabis company. They are differentiated in every way you’d want them to be differentiated. That is, Aphria is profitable — no one else in the cannabis space is. They operate at industry-best gross margins, are growing way faster than peers, appear to be on a path towards sustained big growth over the next several years, and have positioned themselves to be a very attractive (arguably, the most attractive) big money target in the cannabis world.
In other words, thanks to the company’s blowout Q4 print in early August, APHA has become a high quality pot stock, and one worth buying here and now.
Fourth-Quarter Numbers Were Spectacular
Aphria’s Q4 print was spectacular. There’s honestly no other way to say it. The numbers didn’t just blow Street estimates out of the water, but they actually gave a pretty convincing argument for why Aphria may be the best game in town when it comes to pot stocks.
Here are the simple facts. Aphria reported over 100%-plus sequential volume growth in terms of kilograms of cannabis sold last quarter — a better mark than any of the other major and relevant players in this industry. APHA also reported nearly 90% sequential cannabis revenue growth — also a better mark than most of other major and relevant cannabis players.
More impressively, Aphria netted cannabis gross margins north of 50% in the quarter — versus sub-30% gross margins at most other cannabis companies last quarter — and because of those sky high gross margins, APHA actually reported materially positive EBITDA in the quarter. No other cannabis company has reached that profitability mark yet.
In other words, Aphria’s Q4 numbers showed that this company is one of the fastest growing pot companies with one of the smallest cost bases and most favorable margin profiles. The sum of which has led to APHA being the only pot company to be profitable thus far.
Aphria Stock Will Head Higher
Qualitatively, Aphria is the low-cost, “discount” cannabis producer in the Canadian market. That’s because they’ve mastered the game of producing low-cost cannabis, so they have been able to sell their cannabis products at market low prices but with still sizable gross margins.
Sound like a winning combination? It is. Indeed, it’s a combination that should propel APHA stock higher over the next few quarters.
Zooming out, Aphria has favorably differentiated itself from other players in this space at the same time that APHA stock trades at a huge discount to peers, with a ~2x EV-to-forward-sales multiple, versus 6x to 12x for most other relevant pot stocks.
Thus, you have a winning pot stock trading at a huge discount. That’s a favorable combination. Ultimately, it has two implications. First, investors will rush into APHA stock in a struggling pot sector because it offers a rare sign of operational strength. Second, big consumer packaged goods companies looking to invest in the cannabis space should be attracted by Aphria’s favorable financial profile and the stock’s discounted valuation.
Both of those implications are favorable for APHA stock. Together, they pave a visible runway for APHA stock head higher in the near to medium term.
Bottom Line on APHA Stock
I haven’t always been a fan of APHA stock. But, following the company’s blowout fourth quarter earnings report, I think this pot stock has enough good stuff going for it — big growth, big margins and early profits, all against the backdrop of a discounted valuation — that it should be able to head materially higher over the next few quarters.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
