In a relatively short time, the legal cannabis sector has harshly transitioned from one of the most promising markets to among the truly frustrating. Aphria (NYSE:APHA) has actually experienced multiple boom-bust cycles, recovering from a short-seller’s accusation of being a “shell game,” only to succumb to last year’s industry-wide hemorrhaging. But with some positive sentiment returning, is now an ideal time to speculate on Aphria stock?
From a long-term perspective, I want to say yes. Although the sector has experienced troubling headwinds, we’re still talking about a previously illegal market becoming a legal one: in my opinion, that has to count for something.
Plus, one of the big dogs of the cannabis industry, Canopy Growth (NYSE:CGC), recently delivered surprisingly positive earnings results. The news sent a positive ripple effect, lifting even unfancied names.
At the time, Aphria stock also joined in on the fun. Recently, though, shares have not inspired much confidence. On a broader level, the technical posture of APHA admittedly looks weak. On a year-to-date basis, shares are down 20%.
If 2020 is supposed to be a recovery year, Aphria stock is doing a poor job of communicating it.
As well, the investor community isn’t in a great mood when it comes to the cannabis market. To regain their trust, companies like Aphria need to demonstrate substantive progress. While APHA has delivered three consecutive quarters of positive adjusted EBITDA, like other cannabis firms, it’s not exactly stable. With a high debt load and negative free cash flow, Aphria has limited options to stay afloat.
Presently, Aphria stock is a study in patience: will investors give it enough time for the underlying company to deliver the goods?
Aphria Stock Could Benefit From an Education
From a lay observer’s perspective, I can understand the negativity toward APHA. Primarily, the supply chain situation in Canada is completely whacky. Moreover, it doesn’t seem to have a realistic pathway toward a favorable solution. After all, weed is weed: it’s not rocket science to grow this stuff.
However, prospective buyers should consider two counterarguments. First, the supply chain headwind isn’t just about an oversupply issue. Rather, as I’ve pointed out several times before, the Canadian government blundered in its licensing process. Generally speaking, the provinces that feature the most adult cannabis users have the fewest number of dispensaries.
Therefore, I don’t view the still robust black market for cannabis in Canada as just a pricing dynamic. Rather, the black market is willing and able to supply what the legal market cannot. The Canadian government can help rectify this dilemma but again, this will take some time.
Second, the basic act of growing weed may not be a rigorous science. However, crafting a distinct cannabis-based therapy that addresses specific conditions is. And this is where Aphria can reestablish trust and confidence.
Although the company has multiple adult-use brands, management principally focuses on its namesake medical brand. In order to lead in this burgeoning subsegment, though, you can’t just throw in any old weed. Different variations of cannabis promote different effects.
Therefore, public education would be huge for Aphria. One of the ways cannabis companies distinguish themselves is through incorporating or accentuating terpenes, or a plant’s aromatic essential oils.
For example, marijuana products that integrate linalool (a lavender-based terpene) promote antianxiety. In contrast, alpha-Pinene (found in rosemary) energizes and promotes mental acuity. So no, weed isn’t “just” weed.
How Long Will Investors Stick Around?
I mention this because it’s important to realize that marijuana companies aren’t necessarily glorified farmers. Similar to other industries, cannabis firms can tweak the ingredients of their products to facilitate desirable results. It’s this tweaking that will separate the great companies from the mediocre.
Moreover, individual opinions in Canada indicate that there is still an education gap among potential consumers. Should the marijuana industry create a more effective marketing campaign, demand could rise.
While this is the exciting upside opportunity for Aphria stock, it requires patience to play out. As I mentioned above, that’s in short supply on the Street, if it exists at all.
Perhaps the best way I can summarize APHA is this: the broader fundamental narrative remains as compelling as ever. But betting that other investors will feel the same is the risky part.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.