With major pot stocks reeling in recent weeks, what’s next for Aphria (NYSE:APHA) stock? In the past year, the shares have fallen from around $10 per share to $4.18 in early trading today. But, with key catalysts in the pipeline, Aphria stock could be a buy at today’s price levels.
Don’t get me wrong. As a longtime cannabis bear, I am skeptical of most pot stocks. Yet Aphria trades at a relatively low valuation. While its peers continue to hemorrhage cash, well-capitalized Aphria stock has a shot at achieving profitability. And while the company may continue to face external headwinds, Aphria’s relatively low valuation may make it preferable to a larger, more expensive pot stock like Canopy Growth (NYSE:CGC).
Let’s dive in and see why, as the cannabis sector burns, beaten down Aphria stock could be a good investment.
New Developments Could Boost Aphria Stock
Quarter-over-quarter sales declines, and reduced guidance are weighing on Aphria stock. As InvestorPlace contributor Vince Martin noted in his column published on Jan. 29, external factors are to blame. That’s the crux of the issue. Until regulatory and industry headwinds improve, Aphria will face challenges in both Canada and Europe.
But recent developments could indicate that Aphria’s fortunes will rebound. In late January, the company received EU GMP certification for its Aphria One facility. That opens the door for the company to boost its lagging European sales. Due to changes in Germany’s medical reimbursement model, Aphria’s distribution revenue fell 9.3% quarter-over-quarter.
But two key upcoming positive catalysts in Canada could boost Aphria stock. First, Aphria’s focus on vaping could boost the company’s results. After the province of Alberta legalized vapes, Aphria now has a larger market for its vaping products.
Secondly, the company has improved its core Canadian marijuana business. As InvestorPlace columnist Chris Lau recently wrote, Aphria’s strong distribution deals and the rapid rollout of new stores could improve its results this year. In addition, Aphria’s Diamond production facility finally received a cultivation license last year. Once the facility is up and running, Aphria can materially boost its annual output.
But valuation, not catalysts, may be the reason to buy Aphria stock at today’s prices.
An Undervalued Name in an Overvalued Space
Valuation is another reason to consider Aphria stock. Since cannabis companies still aren’t profitable, I like to use the enterprise value/sales (EV/Sales) metric to assess their value. Based on this metric, Aphria stock is materially cheaper than its peers, including struggling Aurora Cannabis (NYSE:ACB).
However, Aphria should trade at a lower valuation than its “high-quality” peers like Canopy Growth and Cronos Group (NASDAQ:CRON). That’s because both Canopy and Cronos have blue-chip connections. Canopy has a strategic partnership with deep-pocketed Constellation Brands (NYSE:STZ). Meanwhile, Cronos has cigarette giant Altria Group (NYSE:MO) in its corner.
Yet Aphria is fairly well capitalized. The company has $374.7 million of cash and relatively small operating losses. Aphria also does not have any large capital projects on the horizon. Unlike Aurora, Aphria is unlikely to face a capital crunch. Aphria may not have a blue chip name in its corner, but a recent investment from a large institution indicate that a major investor is upbeat about its future prospects.
I’m not saying Aphria stock is a value play. Far from it. But with Aphria’s valuation lower than that of Canopy, Aphria is more attractive. Both stocks will rise if the marijuana space improves. At least Aphria’s valuation provides some “margin of safety.”
Aphria Offers Opportunity, But Tread Carefully
Challenges remain for marijuana stocks. But Aphria stock may offer an opportunity at today’s prices. Its shares remain depressed due to increased bearishness towards the pot space. But, with its strong balance sheet and tangible catalysts, Aphria could climb in the next few months.
However, Aphria is appealing largely because it’s more attractive than its peers. Aphria’s valuation is relatively low, and its operating performance is strong relative to its peers. But, if negative external factors continue to hurt the sector, expect Aphria stock to fall further.
With this in mind, consider buying Aphria stock, but tread carefully. The shares offer a “cheap” way to play the marijuana legalization trend. But keep in mind that the industry is facing underlying risks.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.