Aphria (NYSE:APHA) stock had a brutal September. The controversy surrounding vaping led investors to dump APHA stock because the company had made a significant investment in this area.
Investigators have not yet determined what caused the illnesses and deaths that appear to have been linked to vaping. Some have blamed flavored products and others see THC-based products such as the ones Aphria planned to sell as the cause. Whatever the cause, this has led to questions about whether APHA can meet its growth targets.
However, the longer-term picture looks brighter. Given Aphria’s lead in other segments, APHA should weather this storm over the long-term, ultimately turning the recent drop of APHA stock into a great buying opportunity.
Vaping Has Weighed on Aphria Stock
Until recently, I owned Aphria stock. I sold my shares as the multiples of APHA and other marijuana stocks continued to fall. However,APHA now trades at just 21.4 times analysts’ average forward earnings estimate. Analysts expect APHA to turn profitable this year, and its earnings should jump by triple-digit percentage levels for at least the next two years.
As a result, I no longer see the price-earnings multiple of Aphria stock as a major concern. In fact, financial data indicates that Aphria stock has again become a buy. InvestorPlace columnist Luke Lango goes further, pointing out that the company’s cost-cutting has given APHA stock the lowest per-unit cash costs in the business
However, investors’ primary concern about Aphria stock now involves vaping, a segment in which Aphria has invested heavily. Experts do not know whether THC-based products, nicotine, or illegal vaping products was the primary cause of the reportedly vaping-linked deaths. The New England Journal of Medicine argues that doctors should discourage vaping until researchers can find the cause.
Such warnings cause harm to not only Aphria stock, but its peers such as Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON). All of those companies have also invested heavily in vaping. Given this situation, I think Aphria stock has become a more speculative investment.
The Long-Term Outlook of Aphria Stock Remains Promising
Thankfully, Aphria participates in many segments of the cannabis industry. I see a permanent ban on vaping as unlikely. But even if vaping is curtailed or eliminated, I think Aphria could still thrive.
Aphria remains the third largest producer of cannabis, lagging only Aurora Cannabis (NYSE:ACB) and Canopy Growth. Moreover, it has become the first major cannabis company to earn a profit, and it did so without selling vaping products.
Further, Canada will soon legalize more derivative cannabis products, such as topicals, edibles, oils, and drinks. Analysts expect Aphria stock to become a “top beneficiary” of these segments of the industry.
Vaping is a relatively new segment for Aphria, coming in the wake of its deal with PAX Labs to provide cannabis for vaping products in June. At the time, the companies anticipated that vaping would make up about 30% of the market by 2021.
Given the recent controversy, that percentage will probably tumble tremendously. Consequently, Aphria stock could be weak in the short-term. However, Aphria also appears well-positioned to pivot to other products if regulators clamp down on vaping. As a result, I expect the outlook of APHA stock to improve over the longer term.
The Bottom Line on Aphria Stock
The recent weakness of Aphria stock should ultimately become a buying opportunity. The company entered the vaping industry last June.
Medical experts have linked numerous illnesses and deaths to vaping.It remains unclear, however, whether nicotine, THC, or illegal vaping products caused several vaping users to die. It is also unknown how much revenue vaping will ultimately generate.
However, even under a worst-case scenario, Aphria remains a leading grower of cannabis. It also participates in other segments of the industry. As a result, its revenues should rise further once more cannabis-based products such as edibles and topicals become legal in Canada and other places.
Although the vaping issue has made the outlook of APHA less certain, Aphria stock should move higher over the long-term no matter how much regulators clamp down on vaping.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.