All marijuana stocks were hit hard in 2019 amid a flurry of concerns about the cannabis market, including softening demand, stiff competition from the black market, dropping profit margins, widening losses, and snail-like progress on U.S. federal legalization.
Canadian cannabis producer Aphria (NYSE:APHA) was no exception to this trend. Despite reporting some impressive quarters in 2019 which featured profits — something no other company in this space has done yet — Aphria stock still collapsed by more than 25% last year. But Aphria stock could regain all those losses and then some in 2020.
Everything went wrong for marijuana stocks in 2019. In 2020, everything will go right. Demand trends will improve. Competition from the black market will ease. Profit margins will improve, and losses will shrink. The U.S. will make meaningful progress on legalization. Amid all these favorable developments, beaten-up marijuana stocks will rebound.
Aphria stock will likely outperform during this resurgence because: 1) the company’s growth trends are higher-than-average for the sector 2) Aphria is the only cannabis company that has already reported a profit, and 3) the shares seem woefully undervalued at their current levels.
As a result, Aphria stock looks due for a huge rebound in 2020. Consequently, I recommend buying the shares amid their recent weakness, not selling them.
The Fundamentals of Marijuana Stocks Will Improve
Central to the bull thesis on Aphria stock is the idea that the fundamentals of the cannabis market will improve in 2020. I think that the sector will benefit from several positive trends.
First, demand trends will improve as new products come to market and producers open more stores. Specifically, in 2020 popular cannabis derivatives like edibles and vapes will finally be sold by legal retailers. This influx of new products should help stimulate demand trends in Canada. At the same time, a ton of cannabis retail stores will open in 2020. This expansion should also provide a demand lift.
Second, competition from the black market should ease in 2020. Legal cannabis producers were new to the game in 2019. Before the year began, they had only sold cannabis in Canada for a few months. Naturally, they struggled to compete with black market sellers, who had been doing selling cannabis for years.
Now, though, legal producers have more than a year of experience under their belt, and as 2020 progresses, they will more effectively address supply shortages, logistics challenges, and pricing headwinds. As a result, legal cannabis players should compete more effectively with the black market.
Third, depressed profit margins across the industry should rise due to improving demand trends and easing competition from the black market. As demand increases, cannabis producers’ gross margins will increase because they won’t have to offer price discounts as frequently. And due to decreased competition, producers’ revenue will climb, increasing their profitability.
Fourth, amid improving demand trends and rising profit margins, producers’ losses will shrink in 2020. That, in turn, will increase investors’optimism and cause analysts to raise their long-term profit estimates for the sector.
After connecting all the dots, I think that marijuana stocks are due for a big rebound in 2020.
Aphria Stock Will Rebound
Amid the huge 2020 rebound of marijuana stocks, Aphria stock should outperform the group for a few reasons.
First, Aphria’s 2019 results indicate that it should do better than its peers when the cannabis market rebounds this year. That is, although most cannabis producers reported flattish or even negative sales and volume growth in 2019, Aphria’s revenue and volume growth rates were consistently positive. In other words, Aphria was able to grow in a tough market, so it should be able to grow even more in a good market.
Second, Aphria is still the only cannabis company to have reported a profit, and that makes the company attractive to investors. The rebounding fundamentals of the cannabis market will attract investors back to beaten-up marijuana stocks.
But some investors will still have reservations regarding the sector’s long-term profitability. Those investors will be increasingly attracted to Aphria stock because Aphria is the only company in the space to have reported a profit. Consequently, APHA stock should benefit from more buying pressure in 2020 thanks to its status as the only profitable cannabis company.
Third, Aphria stock seems woefully undervalued at its current levels. Even after a really ugly 2019 for Aphria and the cannabis market, analysts’ average earnings per share estimate for Aphria in 2021 still sits at 40 cents. Naturally, as the fundamentals of the cannabis market improve in 2020, the average EPS estimate should move higher. But, to be conservative, let’s assume it doesn’t. Let’s also simply assume that, by the end of 2020, Aphria stock will change hands for 21 times the average forward earnings estimate, which is average for growth stocks.
Based on that combination, my 2020 price target for APHA stock is $8.40. That’s about 75% higher than where the shares are trading today.
The Bottom Line on Aphria Stock
Marijuana stocks are due for a huge rebound in 2020. Aphria stock won’t be an exception to this trend. Instead, APHA stock will likely outperform during this rebound, thanks to the stock’s favorable fundamental and valuation characteristics. Because of that, I think APHA stock can rally about 75% in 2020.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
