Aphria (NYSE:APHA) stock surged tremendously yesterday after the company reported impressive third-quarter numbers which smashed analysts’ average earnings expectations. Specifically, Aphria – best known as the only cannabis company to report a quarterly profit – was in the black again last quarter. Analysts, on average, had expected APHA to report a loss. The surprise profit sparked a 20%-plus rally by Aphria stock.
Normally, I don’t like to buy stocks after they rally. But I think Aphria stock is worth buying after its rally. Aphria’s strong earnings report – its second strong earnings report in a row – underscores that Aphria stock can rally around 450% in the next several years.
APHA has clearly found a high-demand niche as a low-cost cannabis player. Consequently, it has the opportunity to generate high revenue, margins, and profit growth over the next few years. Very little of that growth potential is priced into APHA stock today. Indeed, there is a scenario in which Aphria stock can near $25 within the next several years.
APHA is a $5 stock today. As a result, its long-term potential is compelling enough to justify buying the shares in the wake of their rally.
Aphria Is a Winning Cannabis Company
Over the past few months, Aphria has emerged as a cannabis company that is winning while its peers are losing.
Specifically, this company has rattled off back-to-back strong earnings reports, both of which featured strong sales volume growth, high revenue growth, strong margins, and a profit. Elsewhere in the cannabis space, producers are struggling with selling cannabis products, and their revenue growth has been flat or negative. Their margins are tumbling, and they won’t be profitable for a long time.
APHA is dominating the low-cost-cannabis niche. That is, while everyone else was focused on expanding production and market share over the past year, Aphria focused on minimizing its production costs. It did just that. Now it has the lowest production costs in the industry. Consequently, it has become the dominant low-cost player in the Canadian cannabis market, selling cannabis at a huge discount to its peers while simultaneously sustaining strong margins.
The company’s cost advantage will last for a long time. Sure, other companies are trying to catch up. But they have a long way to go, and while they try to catch up, Aphria will become known as the top discount player in the cannabis market. As a result, the company will continue to dominate the discount niche whose appeal to many cannabis users will be strong.
Aphria has leveraged its low-cost production capabilities to become the dominant discount player in the cannabis market. By attaining that status, it has made its long-term-growth outlook very clear.
Aphria Stock Can Jump Tremendously Over the Long-Term
Assuming Aphria does maintain its position as the discount leader in the continuous-growth global cannabis industry, then Aphria stock can jump hundreds of percentage points above its current levels.
Aphria’s guidance calls for its revenues to nearly triple this year to above $500 million. The company has been growing at similar rates over the past several years. Further, Aphria’s huge production capacity potential implies that its revenue can continue to increase rapidly over the next several years.
Analysts, on average, call for Aphria’s revenues to rise by more than 30% in FY21 and again in FY22. Those estimates make sense to me. Further, I think Aphria can leverage its low-cost advantage to continue to grow by 20%-plus into FY26. At the same time, Aphria should be able to drive its margins higher as its higher sales reduce the impact of its fixed costs on its profitability.
So today’s average estimates calling for roughly 10 cents of EPS in FY20, about 25 cents of EPS in FY21, and over 40 cents of EPS in FY22 make sense. Indeed, I think the company’s EPS is marching towards $1.50 by FY 26. Assuming a market-average 16-times forward earnings multiple for APHA stock, Aphria stock would reach $24 in FY25 if the average FY26 EPS estimate is $1.50 then.
The Bottom Line on APHA Stock
Through consecutive strong earnings reports, Aphria has distinguished itself as a winning, discount player in the cannabis market. Assuming Aphria can continue to dominate the discount niche for the foreseeable future, the company’s revenue and profit should increase rapidly over the next several years.
At its current levels, Aphria stock doesn’t reflect this growth outlook. Consequently, APHA stock can surge about 450% over the next few years.
As a result, APHA stock looks pretty compelling right now.
As of this writing, Luke Lango was long APHA.