Aphria (NYSE:APHA) reported its second consecutive quarterly profit Oct. 15. Initially, Aphria stock jumped 25% on the news. Since then, it’s fallen back some. More importantly, it still trades 11% below where it started the year.
It seems investors have no clue what they want from cannabis stocks these days. That’s really bad news for anyone expecting to profit from APHA stock or any of the other Canadian producers.
Irwin Simon and Aphria Stock
“In the context of poor sector sentiment, profitability becoming an increasing focus, and guidance scarce, this print is very reassuring and supports our conviction in the name,” Jefferies Financial (NYSE:JEF) analyst Ryan Tomkins stated in a note to clients in August after notching its first of two consecutive profits. “Names who can show a route to profitability (or are there now) have the greatest likelihood of attracting near term investor interest.”
So, the fact it was able to deliver a second consecutive quarterly profit at a time when companies like WeWork are trying to IPO despite losing millions of dollars, suggests that investors have completely lost faith in the cannabis industry.
It doesn’t help when you realize that the CAD$16.4 million profit Aphria reported Oct. 15, excluding the non-operating income of CAD$20.3 million, would actually have been a CAD$3.9 million loss.
Nor does it help that 76% of the company’s revenue in Q1 2020 was from CC Pharma, Aphria’s German pharmaceutical distributor. Sure, the company intends to use CC Pharma as its platform for cannabis growth in Europe, it’s got a ways to go before the division is generating substantial cannabis revenues.
Sales Improvements and Aphria Stock
In the first quarter, Aphria grew its cannabis revenue by 164% year over year to C$35.1 million and 7.6% on a sequential basis from Q4 2019.
That’s good news in an industry that can’t seem to generate a profit to save its life. If you’re not making money because you’re building scale, you would think investors would at least be happy about the triple-digit sales gains that Aphria and the rest of the big players are delivering, yet that doesn’t seem to be the case.
Irwin Simon’s got to be frustrated that Aphria grew sales by 164%, delivered an all-in cost of C$2.52 per gram on the 6.0 million grams of cannabis sold during the quarter, and generated a small adjusted EBITDA profit of C$1.3 million (by comparison, Aurora Cannabis (NYSE:ACB) had an adjusted EBITDA loss of $11.7 million) but its share price continues to trade around $5, well below its 52-week high of $13.45.
With Aphria projecting annualized Canadian marijuana revenue of C$1 billion by the end of 2020’s calendar year and some of the industry’s best cost controls, it ought to be able to continue to generate quarterly adjusted EBITDA profits.
The problem is investors don’t seem to care.
The Bottom Line on Aphria Stock
In the past, I’ve been skeptical of Simon’s ability to drive Aphria to future success.
However, like many of the analysts who’ve chimed in since the company announced its first-quarter results, I’m more optimistic today than I was at the start of the year.
Down 11% year to date through October 23 and 58% over the past year, aggressive investors interested in a cannabis play ought to be considering APHA stock.
It can’t be any worse than some of the money-losing unicorns that have gone public in the past year.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.