Following a disastrous performance in 2019, marijuana stocks are staging a huge comeback in early 2020. So far this year, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is already up about 10%, representing an impressive average gain per trading day of nearly 1%.
But one marijuana stock missing out on this party is Aphria (NYSE:APHA). Best known as the only cannabis company to report a quarterly profit so far, APHA has not rebounded with its peers in 2020. Instead, Aphria stock is flat in 2020.
This relative underperformance of APHA stock won’t last.
Aphria’s trends are too favorable, its fundamentals too good, and its valuation too discounted to keep Aphria stock depressed for much longer. As marijuana stocks continue to rebound throughout 2020 amid favorable cannabis trends, Aphria stock will turn into the one of the segment’s hottest stocks. Indeed, my estimates indicate that Aphria stock could more than double this year.
Here’s how that could happen.
Marijuana Stocks Will Keep Rebounding
Central to the bull thesis on APHA stock is the idea that the entire cannabis sector will rebound dramatically in 2020.
Three positive catalysts will drive that rebound. First, the currently depressed demand trends of Canada’s legal cannabis market will improve significantly in 2020. The factors that will bring about its improvement are the introduction of new edibles and vape products, more aggressive launches of new stores, and logistical improvements by legal suppliers and distributors. The demand rebound will turn falling revenue growth rates across the whole industry into rising revenue growth rates.
Second, the supply glut of Canada’s legal market will ease due to accelerating demand trends. Economics 101 teaches that falling supply and rising demand lead to higher prices. Higher prices create higher margins. Consequently, the cannabis industry’s margin weakness of 2019 could turn into margin strength in 2020.
Third, various cannabis markets outside of Canada will gain traction and turn into meaningful revenue contributors for legal suppliers. That is, governments around the world will adopt more lenient marijuana laws, thanks to increasing pressure by consumers for such laws. As that happens, more countries will legalize cannabis in 2020. At the same time, more and more states across the U.S. will legalize marijuana, and more and more Canadian cannabis companies will jump into the U.S. market.
The marijuana industry seems optimally positioned for a huge rebound in 2020, meaning that the recent strength of the sector’s stocks will most likely persist.
Aphria Stock Will Join The Rally
Aphria stock is currently sitting out the big rally by cannabis stocks. That won’t last forever. Soon enough, Aphria will join the rally, and when it does, Aphria stock could explode higher.
Investors have been relatively bearish on Aphria recently because the company’s second-quarter earnings report, delivered in early January, missed analysts’ average expectations, and the company, in conjunction with the results, cut its full-year revenue and profit guidance. But the miss doesn’t tell the whole story.
Aphria’s trends are actually pretty good. Its quarter-over-quarter cannabis revenue growth and its QoQ cannabis volume growth accelerated compared with Q1’s rates. Those two data points imply that demand for Aphria’s cannabis is rising. At the same time, its cannabis gross margins improved tremendously, rising from 50% in Q1 to 57% in Q2. The data supports the idea that improving supply-demand dynamics are meaningfully lifting Aphria’s margins.
Aphria has all the momentum it needs to join the marijuana stock rally, as demand for its products is accelerating and its margins are expanding.
Eventually, these improving growth trends, combined with the massively discounted valuation of APHA stock, will produce an epic rally by the shares.
Analysts, on average, expect Aphria’s fiscal 2022 earnings per share to be 40 cents. That estimate will prove to be conservative. My modeling indicates that improving demand and margin drivers will push the company’s FY22 EPS to 50 cents or higher. Based on a forward earnings multiple of 20, which is average for growth stocks, my 2021 price target for Aphria stock is $10.
The shares closed at $5.19 yesterday.
The Bottom Line on APHA Stock
Aphria stock has sat out the 2020 marijuana stock rally so far, but it won’t remain on the sidelines forever. Instead, as soon as worries about the Q2 earnings report fade, the shares will start to climb higher. Given how cheap this stock is and how good APHA’s fundamentals are, the rally will be huge and could reach 100%.
As of this writing, Luke Lango was long CGC.