Aphria (NYSE:APHA) has performed better in 2019 than many of its Canadian cannabis peers, including the biggies: Canopy Growth (NYSE:CGC) and Aurora (NYSE:ACB). Aphria stock has lost “only” 16% of its value this year, and the company has strung together two straight quarters of profitability. Being in the black is rare in the industry. Despite its performance, APHA has been hammered along with other cannabis stocks this week, dropping a further 6.82% to close at $4.78 on Wednesday. That brings its total decline so far this week to over 13%. This industry weakness is happening just as “Cannabis 2.0” launches in Canada, legalizing the sale of additional products, including edibles.
Wasn’t the arrival of Cannabis 2.0 supposed to have the opposite effect for these companies? And why is APHA stock getting hammered as well?
The initial legalization of recreational marijuana in Canada took effect on October 17, 2018. That made Canada the second — and largest — country to legalize marijuana at the national level. Analysts were pumping up the potential gold mine, with one report from Deloitte predicting Canadians would spend 7 billion CAD per year on cannabis in 2019. It made for heady times for cannabis investors. In the lead-up to the big day, Aphria stock was trading as high as $15.49 last September.
Unfortunately for investors who bought in at the peak, the reality of Canada’s recreational marijuana market soon hit home. There were issues with supply, distribution and a lack of legal retail outlets. In the first two weeks of legalization, sales for the entire country totaled 43 million CAD. In the second full month of legalization, national sales were 55 million CAD. Cannabis stocks tanked as the dreadful sales numbers came in. By Dec. 21 last year, Aphria stock had dropped to $4.85, losing 69% of its value in just three months.
The big hope for cannabis stocks has been Cannabis 2.0, the legalization of products such as edibles and vapes, which took effect on October 17, 2019.
The Perfect Storm of Cannabis 2.0 Hits Aphria Stock
Cannabis companies and their investors have weathered a difficult year, but Cannabis 2.0 has been counted on as a catalyst for growth. Unfortunately, it has been off to a very slow start. First of all, that Oct. 17 date marked the point where manufacturers could submit samples for government inspection. Dec. 17 was the true big day when the new products could hit retail shelves.
Several provinces (including Ontario) don’t allow cannabis manufacturers to sell directly to retailers, so edibles and other products won’t actually be on shelves in these locations until January.
However, the arrival of cannabis-infused vape products in Canada happens just as the entire vaping industry is under the cloud of investigation over vaping-related illness and deaths. There is the potential that Health Canada could remove these products from shelves, and in the meantime, the investigations could scare off consumers.
Perhaps the biggest issue is that Canada still hasn’t addressed a lack of legal retail cannabis outlets, especially in Ontario — the country’s most populous province. Ontario licensed only 25 legal pot shops for 2019. That is for a province of nearly 351 million square miles and 14.57 million inhabitants, including the country’s capital and its largest city. The Ontario government is working to open more stores in 2019, but it’s clearly going to be nowhere near the 1,000 retail locations that had originally been batted around. It doesn’t matter what cannabis manufacturers are allowed to sell if the majority of potential consumers in their largest Canadian market can’t easily buy them.
Adding to the misery of cannabis companies, is a growing cash crunch across the industry.
Dec. 17 was technically a big day for Cannabis 2.0 in Canada, but the reality (and letdown) of the situation has led to cannabis stocks being punished this week instead of celebrating. Aphria stock has been hit along with the rest, despite being that rare cannabis company that has actually reported two straight profitable quarters.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.