With marijuana stocks in a grueling bear market, earnings season is definitely critical for the cannabis sector. So far, on the one hand, there was the terrible preliminary report from Hexo (NYSE:HEXO), which crushed the stock.
But there was a bright spot as well: Aphria (NYSE:APHA). Last week, the company reported its fiscal first-quarter results and they were pretty good. In the wake of the news, APHA stock spiked 25%.
Yet the gains quickly disappeared. The fact is that Wall Street remains quite skeptical about marijuana stocks.
But for longer-term investors who have the stomach for volatility, Aphria stock does look like an interesting opportunity. Keep in mind that APHA has reported two consecutive quarters of profitability. By contrast, most of the other cannabis companies are deeply in the red.
But APHA’s focus on profitability has not stunted its growth. In its last reported quarter, its revenues soared 849% year-over-year to CA$126.1 million and its EBITDA came in at $16.4 million, versus $1 million during the same period a year earlier.
And there are no signs of its momentum slowing. APHA’s guidance calls for fiscal 2020 full-year revenues to range from CA$650 million to CA$700 million and its adjusted EBITDA to be between CA$88 million and CA$95 million.
Regarding production, APHA continues to be aggressive. Its annual production capacity is expected to reach 255,000 kilograms. Note that APHA is the third largest cannabis producer in Canada, behind Aurora Cannabis (NYSE:ACB) and Canopy Growth (NYSE:CGC).
The Right Strategy
Aphria stock has positive catalysts aside from the Canadian market. The company has also had much traction in Germany, which has proven to be a lucrative market.
What’s more, Aphria has been smart to create an assortment of high-quality brands. Its resulting differentiation should help it stand out from the crowd and charge higher prices.
All of this is in sharp contrast to where the company was a year ago. At that time, it had accounting issues, which required it to take goodwill write-offs. The company was also the target of a hostile takeover attempt by Green Growth Brands (OTCMKTS:GGBXF).
But Irwin Simon, who came on board as the interim CEO, has taken the right actions to get things on track. It certainly helps that he has a strong management background, after having been at the helm of Hain Celestial Group (NASDAQ:HAIN) for 25 years.
A key part of his strategy has been to focus on building a strong supply chain to lower the costs of production. So as supply has increased greatly in the Canadian market – spurred by the black market’s activities – APHA has been able remain highly competitive and grab more market share.
Finally, with CA$464.3 million in the bank, the company is in a strong financial position. In other words, APHA can capitalize on M&A opportunities, which are getting more attractive as valuations rapidly drop.
The Bottom Line on Aphria Stock
Importantly, Simon’s strategy of staying focused on profitability will prevent the company from coming under pressure to obtain new funds. That’s particularly important given the harsh conditions currently facing the cannabis sector.
Moreover, trading at about seven times its sales, Aphria stock has a reasonable valuation. By comparison, many other top marijuana stocks have multiples at 20+.
Granted,in light of the recent tumbles of many marijuana stocks, many investors could ignore the upbeat fundamentals of Aphria stock. But that’s why it’s a good idea to be patient with APHA stock.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.