Aphria Inc: 2020 Could Be a Big Year for This Pot Stock

This Pot Stock Deserves a Serious Look

If you’ve been following pot stocks, Aphria Inc (NYSE:APHA) should be a familiar name. Headquartered in Leamington, Ontario, Canada, Aphria is one of the few pot companies that trade on the New York Stock Exchange.

In Canada, a country that legalized recreational pot in October 2018, Aphria has an entrenched market position. The company’s products won seven Canadian Cannabis Awards in 2019 and are sold in over 500 physical stores nationwide. (Source: “Company Presentation January 2020,” Aphria Inc, last accessed March 5, 2020.)

Aphria has three state-of-the-art, purpose-built facilities that grow cannabis for the Canadian market—two in Leamington, Ontario and one in Duncan, British Columbia. At full capacity, these three facilities are licensed to produce 255,000 kilograms (562,179 pounds) of pot annually.

One of the main reasons investors like pot stocks is that the companies tend to grow rapidly. As one of the bigger players in the cannabis industry, Aphria does not disappoint on that front.

In the second quarter of Aphria’s fiscal year 2020, which ended November 30, 2019, the company generated CA$29.0 million in recreational cannabis revenue, representing a 46% increase sequentially. (Source: “Aphria Inc. Announces Third Consecutive Quarter of Positive Adjusted EBITDA and a 46% Increase in Adult-Use Cannabis Revenue from Prior Quarter,” Aphria Inc, January 14, 2020.)

Net cannabis revenue came in at CA$33.7 million, up nine percent quarter-over-quarter.

Adding Aphria’s distribution revenue to its net cannabis revenue, we see that the company earned total net revenue of CA$120.6 million in the second fiscal quarter. While the amount is down four percent from the prior quarter, it marked a whopping 457% increase from the year-ago period.

Furthermore, Aphria generated adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) of CA$1.9 million in the reporting quarter, up 90% from the prior quarter. Note that this marked the third consecutive quarter in which the pot company delivered positive adjusted EBITDA.

Aphria Inc’s Quarterly Recreational Cannabis Sales (CA$ Millions)

(Source: Ibid.)

Things have been going in the right direction for Aphria. In the second fiscal quarter, the cannabis producer sold 7,062 kilograms (15,569 pounds) of pot. That’s 18% more than what it sold in the first fiscal quarter. (Source: “Aphria Inc. Management’s Discussion & Analysis,” Aphria Inc, last accessed March 5, 2020.)

At the same time, the company’s cash cost to produce one gram of cannabis declined 22.4% to CA$1.11.

That’s not all; this year, Aphria could be capitalize on a major opportunity—the German cannabis market.

A New Catalyst for APHA stock in 2020?

While a lot of pot companies are focusing on the Canadian market, there is something unique about Germany’s cannabis industry. In particular, Germany has a population that’s 2.3 times that of Canada.

Furthermore, medical cannabis is covered by health insurance in Germany, while most Canadian patients have to pay for it out of pocket. It’s estimated that the German medical cannabis market alone is larger than the Canadian recreational and medical markets combined. (Source: “Company Presentation January 2020,” Aphria Inc, op. cit.)

As it turns out, Aphria is ready to tap into that giant market. The company’s German subsidiary Aphria Deutschland GmbH (aka Aphria Germany) has been granted five lots for medical cannabis cultivation by Germany’s health regulator, the Federal Institute for Drugs and Medical Products (BfArM). (Source: “Aphria Completes German Tender Process and Receives Fifth Cultivation License in Germany,” Cision, May 21, 2019.)

Note that there were only 13 lots that were up for grabs, so by getting five of them, Aphria Germany stands as one of the biggest winners. Aphria Germany is also the only licensed producer with the permission to grow all three strains of medical cannabis approved by the BfArM.

And since each lot allows the holder to grow 200 kilograms (441 pounds) of cannabis per year, Aphria Germany will be able to produce 1,000 kilograms (2,205 pounds) of pot annually. (Source: “Aphria Inc. Management’s Discussion & Analysis,” Aphria Inc, op. cit.)

When Aphria Germany was awarded the fifth lot, its managing director Hendrik Knopp said, “This award affirms Aphria’s leading position in the German medical cannabis market. Construction on our indoor cultivation facility continues to progress rapidly and we look forward to supplying Germany’s first domestically-grown medical cannabis in early calendar 2020.” (Cision, op. cit.)

Analyst Take

At the end of the day, just like any stock, APHA will likely see ups and downs in its share price as the market enters a period of uncertainty.

But 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.