Aphria (NYSE:APHA) stock rose nicely last month. After falling to as low as $5.02/share, Aphria stock rallied in early August on strong earnings. APHA has since declined from $7.45/share to around $6.95/share.
At its current valuation, APHA stock trades at a discount to Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC). But does this make Aphria stock a value play? APHA has a tarnished reputation. But the company’s recent earnings success could be a signal that Aphria’s future prospects remain strong.
Let’s take a closer look at APHA stock, and see if now’s the time to buy.
A Closer Look at APHA
Like Aurora, Aphria has focused on the medical side of cannabis. The medical space is less “cool” than the recreational side. But it offers a more stable opportunity. Similar to Aurora, Aphria has focused its efforts on international markets. With the Canadian market still suffering a supply glut, geographic diversification is a smart move.
APHA has had the most success in Europe, particularly Germany, and in Latin America. After acquiring CC Pharma, Aphria is now one of three companies with a cultivation license in Germany. With a solid foothold in that market, Aphria is doubling down on that market.
Overall revenues for the quarter that ended in May were C$128.6M. That was up from C$73.6M in the prior quarter. Gross profits doubled from C$17.3M to C$36M.
After these improvements, APHA has high hopes for fiscal 2020. In FY20, the company anticipates net revenue of between C$650m-C$700m. Its guidance calls for adjusted EBITDA of between C$88m and C$95m. That means APHA is getting close to profitability.
But APHA stock has many red flags. As InvestorPlace contributor Josh Enomoto detailed on August 15, the company suffered a big scandal, as a short seller accused the company’ top executives of looking to personally profit from acquisitions. As a result, the company’s CEO and co-founder were ousted. The company’s use of figures such as “Adjusted EBITDA” and other non-GAAP figures is also worrisome. True profitability could be many years off for APHA.
With this in mind, investors may want to assess the company’s projections with a critical eye. But has this scandal created a buying opportunity? Let’s see how the valuation of Aphria stock stacks up to its peers.
APHA Trades at a Lower Valuation Than Its Peers
When comparing marijuana stocks, I typically use Enterprise Value/Sales ratio. For now, that remains the most clear valuation metric. Based on this ratio, Aphria stock is undervalued. The company’s current EV/Sales ratio is 9.5, representing a sharp discount compared to its peers:
Aurora Cannabis: EV/Sales of 46.1
Canopy Growth: EV/Sales of 36.2
Cronos (NASDAQ:CRON): EV/Sales of 98.7
Hexo (NYSE:HEXO): EV/Sales of 40
But this discount could be the canary in the coal mine. The company has had asset write-downs in the past, and APHA may have to write down its $500m acquisition of Nuuvera . Given that the market cap of Aphria stock is $1.7 billion, that is a serious impairment charge. And as with other pot stocks, the dilution of APHA stock is a concern. To fund its operations, APHA issued convertible debentures. These debentures are convertible into 37.3M shares of Aphria stock. This dilution could minimize the gains of Aphria stock.
The Bottom Line on APHA Stock: High Risk and a Huge Opportunity
Aphria stock sells at a discount to its peers. But the company’s tarnished reputation is a concern. Be cautious before buying into the company’s elevator pitch. However, the company is focused on a more stable market, medical marijuana, than some of its peers. Moreover, tts success in Germany has given it a blueprint for success. That success could be duplicated in other European markets.
The cannabis industry remains overvalued. Negative investor sentiment could push marijuana stocks down further. It is tough to call a bottom. But marijuana stocks could soon be selling at more reasonable valuations. If that scenario unfolds, APHA may become a solid play. Keep APHA on your radar, but be cautious about buying Aphria stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.