On Oct. 25, I recommended that aggressive investors consider taking a position in Aphria (NYSE:APHA) because it was one of the few profitable Canadian cannabis companies. At the time, Aphria stock was down 11% on the year and 58% over the past 52 weeks.
Since then, it’s proceeded to lose 17% of its value — and that’s after recovering from hitting an all-time low of $3.76 on Nov. 19.
The Canadian cannabis industry has been making a lot of stock prognosticators, including myself, look silly in 2019. Will it ever stop?
I have to believe it will.
Industries mature, profits are had, market share is gained, life carries on.
With APHA stock on a 24% roll since Nov. 19, those interested in Aphria stock must ask themselves this question: Has APHA bottomed, or is this latest move a dead cat bounce?
Aphria Stock Has Bottomed
It’s true that Aphria’s second consecutive quarterly profit came with an asterisk. It earned 16.4 million CAD in the first quarter of fiscal 2020 thanks to non-operating income of 20.3 million CAD. Exclude the non-operating income, and it had a net loss during the quarter.
However, its adjusted EBITDA from its cannabis operations was 1.3 million CAD in the first quarter. That follows a 1.9 million CAD adjusted EBITDA profit in Q4 2019, which followed a 12.7 million CAD adjusted EBITDA loss in the third quarter of fiscal 2019.
In other words, in fiscal 2019 and now in 2020, Aphria has made significant strides as a company. On the top line, revenue from cannabis has grown from 15.4 million CAD in Q3 2019 to 30.8 million CAD in Q1 2020, a 100% increase in sales on the cannabis front.
That’s especially important because CC Pharma, the company’s German pharmaceutical distributor, generates significant non-cannabis revenue — 76% of Aphria’s overall sales of 126.1 million CAD in the first quarter — which obscures the cannabis operations’ actual effectiveness.
Once the distribution arm starts making inroads selling cannabis in Europe, its gross margins will move much higher. By comparison, Aphria’s cannabis operations have adjusted gross margins in the upper 40′s to low-to-mid 50’s.
That should help keep the company profitable on an adjusted EBITDA basis.
It’s Nothing But a Dead Cat Bounce
Aphria’s business might be moving in the right direction. Still, as InvestorPlace’s Luke Lango said recently, the entire Canadian cannabis industry is facing major headwinds at the moment. And these are headwinds that aren’t likely to disappear anytime soon.
“This double headwind of sluggish sales/demand growth and eroding margins has killed the entire cannabis sector over the past few months,” Lango wrote Nov. 26. “Unfortunately, it doesn’t look like things will get better any time soon.”
Stock prices move higher on catalysts. Until Aphria can provide investors with empirical evidence that it’s not prone to the same issues facing other Canadian producers, it’s hard to imagine Aphria stock breaking out beyond $5.
Furthermore, with supply exceeding demand by a considerable margin in Canada, cannabis prices are dropping like a stone, making it exceedingly difficult for anyone to make money off pot, including Aphria, one of the lowest-cost producers in the country.
To Buy or Not to Buy?
Long term, I see Aphria doing very well for itself. But it’s going to take time. You’ve got to be patient about your investment and be willing to step in and buy whenever it corrects. That takes courage.
If you don’t have the stomach for it, I recently recommended two U.S. cannabis producers whose stocks are both doing very well and should maintain momentum into 2020.
As for APHA bottoming, I think it could fall into the low $4 range in early January if its Q2 2020 report doesn’t deliver a third consecutive profitable quarter.
That said, I don’t see it falling below $3.76 a share soon, so govern yourself accordingly.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
