After falling sharply from its 52-week high of $10.95, Aphria (NYSE:APHA) stock has remained range-bound in the last few months. I believe that Aphria stock can remain in a range of $4 to $6 per share for the foreseeable future. The next major move of APHA stock is likely to be determined by the company’s quarterly results and any potential divergence from its revenue and EBITDA guidance.
Before talking about the company’s fiscal 2020 guidance, I want to provide some insight on its liquidity outlook. The latter issue is important since most cannabis companies are burning cash. Companies with strong liquidity profiles are more attractive investments because they have cushions that help them survive and overcome obstacles and difficulties.
As of August 2019, Aphria reported cash and equivalents of 449 million CAD. Further, in fiscal Q1, which ended in August, the company’s operations lost 31 million CAD of cash. That implies an annual cash burn of 125 million CAD. So APHA will not need additional funds for the next 24-36 months if its cash burn rate remains the same as it was in Q1. Therefore, I don’t think the company will need to sell additional shares of APHA stock. That’s a key positive for the current owners of Aphria stock.
Ambitious 2020 Revenue and EBITDA Guidance
For Q1, APHA reported net revenue of 126 million CAD and EBITDA of 1 million CAD. If it averages the same revenue and EBITDA over the next three quarters, its annual totals would come in at 504 million CAD and 4 million CAD, respectively.
However, Aphria provided 2020 revenue guidance of $650 million to $700 million. In addition, the company expects 2020 EBITDA of $88 million to $95 million. Those targets look steep and are likely to be revised lower.
Aphria reported 95 million CAD of distribution revenue and 31 million CAD of cannabis revenue for Q1. Therefore, the company’s cannabis revenue accounted for just under 25% of its total revenue. For the full fiscal year, Aphria expects nearly 50% of its revenue to come from its cannabis business.
So the company appears to be expecting full-year cannabis sales of approximately 325 million to 350 million CAD. But APHA will have trouble meeting that target. Since its Q1 cannabis revenue was just 31 million CAD, Aphria needs to generate average quarterly cannabis revenue of nearly 100 million CAD for the next three quarters to meet its implied cannabis outlook. It has not given any indication on on how it plans to achieve such a big revenue jump.
It is also worth noting that, in Q1, its gross cannabis revenue rose nearly 5% versus the previous quarter to 35.1 million CAD, while its quarter-over-quarter revenue growth has generally been muted. So the idea of Aphria’s cannabis revenue tripling QoQ certainly seems too optimistic. As a result, the owners of Aphria stock might be disappointed with its Q2 results.
The fact that Aphria’s Q1 EBITDA was positive is certainly a good sign. However, its FY20 EBITDA guidance also seems to be very steep. Aphria stock could very well decline if the company cuts its EBITDA guidance, even if its EBITDA climbs year-over-year.
Germany May Be Aphria’s Next Big Market
Canada is Aphria’s biggest market, but Germany can grow rapidly over the long-term. According to research firm Prohibition Partners, if recreational cannabis is legalized in Germany, the value of the German recreational cannabis market can reach $9.39 billion by 2028. Further, by 2028, the country’s medicinal cannabis market could be worth $8.50 billion, the firm stated. APHA and Aphria stock are well-positioned to benefit from this huge opportunity.
That’s because Aphria has acquired a 25% stake in Berlin-based Schöneberg Hospital. Through this acquisition, the company intends to build pain treatment centers in Germany. In addition, it will help educate the German public on the benefits of medical cannabinoids.
Another key development is that Aphria has received a provisional license to cultivate cannabis in Germany. Its acquisition of CC Pharma, a leading distributor of medical cannabis and other pharmaceutical products, is also important because it gives Aphria access to more than 13,000 pharmacies in Germany.
Aphria is clearly poised to grow in Germany. In coming years, its German business should boost its top-and bottom-line results, providing Aphria stock with an important positive catalyst.
The Bottom Line on APHA Stock
Aphria will have trouble meeting its steep FY20 guidance. However, the company’s long-term outlook is promising. Through acquisitions, the company is entering international markets. Those deals should positively impact its growth in the next three to five years.
In the near-term, Aphria may cut its guidance, causing APHA stock to drop. However, a large drop of APHA stock this year could create a good entry point. In my view, long-term investors can consider buying APHA stock if it drops to $3.50-$4.00.
After marijuana stocks fell sharply in 2019, 2020 might be a year of consolidation and mergers for the sector. Aphria is well-positioned to survive these challenging times and is likely to reward investors handsomely in the long-term.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
