It’s been six weeks since Aphria (NYSE:APHA) reported mediocre earnings and guidance. Since its January 14 Q2 2020 report, Aphria stock has fallen by 30% through February 27. Over the past 52 weeks, it’s lost two-thirds of its value.
While most of its business on this side of the Atlantic seems to be failing to ignite, the company’s German operations continue to look like the crown jewel in Aphria’s kingdom.
Will it be enough to convince investors that $3.50 is an excellent price to pay for its stock in the days and weeks ahead?
That answer’s in the hands of the investing gods. What I do know is that it would be in a world of hurt if not for its overseas business.
If you own Aphria stock and are underwater at this point, I’d wait out the coronavirus-led market correction. If you don’t own APHA, I’d seriously consider taking a position, but only if you can afford to lose the whole nut.
Aphria, under no circumstances, should be held in a tax-advantaged investment account. The potential for further losses is real. However, compared to a month ago, the risk/reward is much healthier. Here’s why.
Germans Love Cannabis
Forget earnings and guidance for a moment and consider CC Pharma and Aphria Germany, the company’s operations in Germany.
In December, InvestorPlace contributor Wayne Duggan listed five reasons why Aphria was a good buy to ride a resurgence in pot stocks. One of those reasons is the fact Aphria has a contract to produce one ton of cannabis for German consumption annually. Given the German demand for cannabis is said to be five times the supply, Aphria’s German subsidiary is likely to get a higher selling price per gram.
On the downside, although CC Pharma saw its distribution revenue fall by 9% in the second quarter on a sequential basis due to a change in the German government’s medical reimbursement model, it was still a considerable difference from the CAD$1.1 million generated a year earlier. If you exclude this business from the income statement, Aphria had just CAD$64.9 million in revenue through the first six months of fiscal 2020.
While CC Pharma’s adjusted gross profit margin of 12.7% isn’t anywhere close to its 56.6% gross profit margin for cannabis, it is a welcome addition to revenues, tiding Aphria over until it can make significant inroads at its Canadian cannabis operations.
Also, the company’s South American operations made progress in the first half of fiscal 2020. Aphria doesn’t need to make an act of desperation that could affect its future profit and revenue potential.
As the company’s contract plays out in Germany, Aphria will see additional European opportunities develop over time. That’s a very good thing if you own Aphria stock.
Canadian Business Isn’t Awful
Although management revised its 2020 revenue outlook lower by CAD$75 million to between CAD$575-625 million, it’s important to remember that its cannabis revenue in Canada will represent almost 50% of that amount.
In the second quarter, its sales from adult-use cannabis grew 45% over the second quarter to CAD$29.0 million from CAD$20.0 million in the first quarter. Meanwhile, Aphria’s medical business had sales that were flat at CAD$10.1 million, down from CAD$10.2 million in the first quarter.
Aphria is quickly moving from a medical cannabis company to one serving the recreational market.
Assuming it hits the low-end of its revenue guidance in 2020 (CAD$575 million), 45% of that is from cannabis sales with a 60/40 split between adult-use and medical cannabis, Aphria could finish 2020 with adult-use cannabis sales of CAD$155.3 million, up from CAD$37.0 million in 2019.
You can argue all you want whether 155 million is the amount of adult-use cannabis revenue a big-league producer should generate. Still, you can’t argue with the fact it’s expected to generate more than three times the revenue from adult-use cannabis in 2020.
That’s not a bad thing by any means.
The Bottom Line on Aphria Stock
With Q2 2020, Aphria delivered its third consecutive quarter with positive adjusted EBITDA.
In January, just hours before Aphria reported Q2 earnings, I argued that investors should wait for the results to come out before buying its stock due to the potential downside. That scenario played out; Aphria stock has lost 30% of its value.
If you can handle the risk, now is an excellent time to buy, although I might save some cash in case the coronavirus correction deepens further.
Long-term, I continue to like Aphria stock.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.