Speculators may hardly complain about the lack of buyers in the cannabis sector. Producers in the consumer and medical space had the once-in-a-lifetime opportunity to raise cash, expand and grow revenue. Today, that optimistic sentiment is absent in the market. Investors are shunning sectors that failed to report profits.
Aphria (NYSE:APHA) is not alone in losing nearly half its value in the last two months. The company soared to $6 a share on Jan. 24 when the European Union awarded the company a Good Manufacturing Practices certification.
So, this enables the company to export internationally from its Aphria One facility. Despite further losses ahead for Aphria stock on souring sentiment, what are the fundamental strengths that the company offers to investors?
Aphria views itself as a leading consumer packaged goods and wellness leader. The company offers long-term growth — as long as the industry evolves. As investors now know, none of the catalysts played out to work in Aphria’s favor. The conversion from illicit to legal products remains a challenge.
Consumers would rather pay over 30% less for illegal cannabis than struggle to find a legitimate store. Legislation in the United States to legalize marijuana is progressing, but slowly. For example, given that the U.S. — and the rest of the world — is preoccupied with stopping the spread of the coronavirus from China, cannabis legalization will likely get delayed.
Strong Position in Canada
Medical research for cannabis-based treatment is ongoing. For an impatient stock market, publishing favorable research reports will not lead to revenue growth. Still, it benefits the industry as a whole, since medical practitioners and the public will gain awareness of medical cannabis.
Aphria’s priority in growing market share across Canada is its immediate strategy. The company said that it reported EBITDA-positive results in its last three quarters. On the supply side, it has state-of-the-art facilities. To foster demand growth, it has a partnership with Shoppers Drug Mart, a national pharmacy chain in Canada, to distribute its goods.
On the marketing side, Aphria has a segmented approach in its consumer branding. Its brands target those in the mainstream searching either for relaxation or to participate in urban culture. Some of its other products focus more on the high-quality market dominated by serious enthusiasts and connoisseurs.
A skeptical investor might wonder how much in sales the high-end consumer group will bring for Aphria. The economy will likely deteriorate sharply in the next two months due to the coronavirus. And if Canada begins reporting more cases, things could get even worse.
Plus, if its competitors like Canopy Growth (NYSE:CGC) begin shutting down facilities, weak demand would almost certainly be ahead for the sector.
Long-Term Opportunity Benefits Aphria Stock
Aphria established a nationwide distribution model in Canada. It signed an agreement with Southern Glazer’s that will give it 99.8% coverage of the Canadian population.
And Shoppers Drug Mart has over 1,300 stores in the country. That network should help Aphria’s revenue grow steadily as it potentially dispenses in stores throughout Canada.
Globally, Aphria is targeting the German medical market. The country has a population that is 2.3 times larger than that of Canada. And in Latin America, where the population is 18 times larger, the company sees an opportunity in the medical market.
In December 2019, Brazil approved the sale of medical cannabis. And in Argentina, Aphria partnered with Hospital Garrahan. This might drive adult-use and medical cannabis sales in the region.
Valuation and My Takeaway on Aphria Stock
Aphria stock is trading close to its fair value, based on its 5-year discounted cash flow EBITDA exit model. These are the following assumptions:
|Terminal EBITDA Multiple||0.3x-1.3x||0.5x|
Data courtesy of finbox.io
Aphria earns a high score on growth but falls short on financial health (such as negative earnings and debt) and recent stock performance.
So, if the company reports exceptionally strong sales growth, this may squeeze the bears. And the bears currently have a strong grip, with a short float of 13.4% on Aphria stock. Online time will tell how the sector’s long-term potential will play out for Aphria.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.