At least on a relative basis, Aphria (NYSE:APHA) stock performed somewhat well in Monday’s selloff. While the market was off about 10%, Aphria stock was actually up about 1%.
But of course, the shares have been in a long-term bear downtrend, as just about every other cannabis stock has been like Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON). During the past year, Aphria stock has gone from $10 to $2.26. The market cap is now about $613 million.
Then what can we expect now? Perhaps the stock could be finding a bottom? Well, it’s really tough to tell. But I think it’s important to take a deeper look at Aphria.
Keep in mind that — within the broad cannabis sector — the company is a top operator. First of all, Aphria has a strong foothold in the Canadian market, with a 13.9% share in Ontario. The company also has distribution in 500+ stores and the footprint is expected to go beyond 3,000. There is also a diversified portfolio of consumer brands and a solid medical cannabis business. In terms of production, there is about 255,000 kg of licensed annual production in state-of-the-art facilities.
Next, Aphria has been getting traction in global markets. The biggest bright spot is Germany, where the company has a contract to produce one ton of cannabis per year. And this is really just the beginning. Note that the medical cannabis opportunity in Germany is 6 times that of Canada’s. A key is the more favorable reimbursement payor policies.
South America is also another positive for Aphria. For example, the company has a presence in Colombia, Argentina, Brazil and Paraguay. There is also the advantage of lower wage and production costs.
Macro Environment
Because of the coronavirus from China, the world’s economies are decelerating at an alarming rate. Yet the hope is that — as there are more aggressive efforts to battle the virus — the situation will start to improve in the second half of this year.
But in the meantime, the demand for cannabis is likely to be severely impacted. Issues in the Canadian market also remain. The government has been slow to issue new permits for retail outlets and has not been proactive in dealing with black market activities.
The moves toward legalization will probably be stopped as well. Let’s face it, governments are focused on the coronavirus. There will simply be little bandwidth to try new initiatives.
Bottom Line on Aphria Stock
The good news for Aphria stock is that the company has a strong balance sheet. It has recently secured an $80 million line of credit (there was no dilution for shareholders). Then in late January, Aphria was able to raise $100 million in a stock offering.
In fact, even before this, there was 497.7 million CAD in the bank. Essentially, when you strip out this cash, the company is essentially being valued at virtually nothing.
The strong liquidity is important for several key reasons. After all, the financing environment is awful. Last week, Tilray (NASDAQ:TLRY) raised $90.4 million in an equity offering and the shares plunged by about a third.
In light of the tough conditions, it seems inevitable that there will be a rash of closures and bankruptcies in the cannabis industry. And, yes, this will not only bring down supply but also mean opportunities for companies like Aphria to get bargains on distressed asset sales.
Now this does not imply that the company’s stock is a sure thing. There are certainly risks. But for investors that are looking for some interesting value opportunities in the cannabis space, Aphria stock is worth considering.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
