Aphria Inc: Up 38% Already…More to Come?

Looking for Pot Stocks? Read This

“With a growing business and a big catalyst on the way, Aphria stock remains one of the top names to consider in the pot industry in 2020.”

That’s what I told readers of Profit Confidential about Aphria Inc (NASDAQ:APHA) earlier this year. In that piece, I explained why APHA was one of the best pot stocks on the market.

Obviously, my timing was not exactly perfect since the U.S. stock market was tumbling when I wrote those words. But I still hope some took heed of what I said in that piece. Since the article was published (on March 6), Aphria stock has surged 38.7%.

The best part is that the opportunity might not be over just yet. Aphria Inc’s growth momentum remains strong, which could further boost its investor appeal.

Allow me to explain…

Aphria Inc (NASDAQ:APHA) Stock Chart

Chart courtesy of StockCharts.com

One of the things that helped Aphria stock get on a nice uptrend recently was its earnings report, which was released on April 14. Note that Aphria operates around a fiscal year that starts on June 1 and ends on May 31, so its latest report was for the third quarter of its fiscal year 2020, which ended February 29.

The report showed that, for the quarter, the company generated CA$144.4 million of net revenue, which represented a 20% increase quarter-over-quarter and a whopping 96% increase year-over-year. (Source: “Aphria Inc. Announces Net Cannabis Revenue Increases 65% From Prior Quarter and Fourth Consecutive Quarter of Positive Adjusted EBITDA,” Aphria Inc, April 14, 2020.)

Notably, Aphria Inc earned CA$55.6 million in net cannabis revenue in the third fiscal quarter, marking a 65% increase sequentially.

Business has been booming, as Aphria sold 14,014 kilograms (or kilogram equivalents), or 30,896 pounds, of pot in the reporting quarter, which nearly doubled the 7,062 kilograms (or kilogram equivalents), or 15,569 pounds, that it sold in the prior quarter. At the same time, the company managed to reduce the all-in cost of goods sold per gram from CA$1.98 to CA$1.69.

For the quarter, Aphria Inc’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA) came in at CA$5.7 million, marking a significant improvement from the CA$1.9 million reported in the previous quarter. The reason is mainly two-fold: Aphria’s adjusted EBITDA from cannabis operations rose by CA$2.6 million, while its adjusted EBITDA loss from businesses under development narrowed by CA$0.6 million. Also, the reporting quarter marked the fourth consecutive quarter in which Aphria Inc generated positive adjusted EBITDA.

Due to the COVID-19 pandemic and the related uncertainties, management suspended their guidance for revenue and adjusted EBITDA for fiscal 2020. However, given the relatively inelastic demand for pot products and Aphria’s solid financial profile, the company should have no problem surviving this unprecedented operating environment.

“As of February 29, 2020, the company had cash of CAD515.1 million to fund planned Canadian and international growth and deal with any COVID-19 pandemic-related financial impacts,” said Aphria’s chief financial officer Carl Merton in the latest earnings conference call. (Source: “Aphria Inc. (APHA) CEO Irwin Simon on Q3 2020 Results – Earnings Call Transcript,” Seeking Alpha, April 15, 2020.)

Analyst Take

At the end of the day, I want to point out that it’s hard to predict investor sentiment, especially sentiment towards pot stocks. Despite legalization efforts, cannabis is still illegal in certain jurisdictions. And that means some investors—including institutional ones—may have second thoughts about buying shares of a pot company, even if it has a fast growing business.

But that, too, could be about to change. Aphria is listed on a major U.S. stock exchange (and also on the Toronto Stock Exchange in Canada). In January 2020, it received a CA$100.0 million strategic investment from an undisclosed institutional investor. The company said that it intends to use the proceeds to finance international expansion, working capital, and general corporate purposes. (Source: “Aphria Inc. Announces Closing of $100 Million Strategic Investment From Institutional Investor,” Aphria Inc, January 31, 2020.)

The idea is that more and more investors have realized the potential of the cannabis industry. And APHA stock could provide be a way to get onboard the profit train.