Aphria Stock Takes a Hit After Disappointing Earnings

There’s one obvious piece of good news in Monday’s fiscal-third-quarter earnings report from cannabis producer Aphria (NYSE:APHA). Revenue rose 617% year-over-year. But that aside, the Q3 release looks disappointing – and investors have reacted as such. APHA stock is down 12% as of this writing.

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For some investors, the revenue growth might be enough. Investors in marijuana plays like Aphria stock presumably know that it will take time for the market to develop. As a result, marijuana producers are likely to run at a loss as they build their respective businesses.

But in a sector whose valuations have soared this year — APHA stock was up 77% YTD before the release — anything short of perfection might not be enough. And given the multitude of options investors have in the space, it’s tougher after earnings to make the case for Aphria stock as the most attractive choice in cannabis.

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Aphria Stock Earnings

Relative to year-prior periods, Aphria’s growth looks impressive. Against expectations, however, the quarter seems to have fallen short. Revenue of C$73.6 million was nearly C$10 million lower than consensus. An adjusted net loss of C$0.20 per share widened year-over-year, and missed the Street by C$0.16.

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To be sure, investors don’t necessarily need to overreact to the shortfall against analyst expectations. Only three analysts appear to have made revenue estimates, and just one for EPS. Revenue modeling is going to be inexact for some time, given how new the industry is. And earnings at this point simply don’t matter all that much: Aphria, like its peers, is investing now to build the infrastucture needed to supply existing and new markets for years to come.

Even with that caveat, however, the numbers don’t look particularly impressive. Most of the 600%-plus revenue growth was acquired, primarily through the recent purchase of Germany’s CC Pharma. CC Pharma is a pharmaceutical distribution company with only modest cannabis exposure at this point. Aurora’s production revenue rose 73%; a solid figure, but not quite spectacular in the context of a price-to-production-revenue multiple that still is over 30x.

Meanwhile, those distribution revenues led margins to crash. Gross margin dropped from 47% to 18%. Aphria’s own release cites very thin margins for CC Pharma: only about 4% in terms of EBITDA. That’s admittedly not surprising — most distributors have narrow margins — but it colors the reported revenue growth.

In that context, the numbers aren’t as impressive as the headlines suggest. Aphria is growing its pot business – but perhaps not as fast as a $2 billion-plus valuation suggests it should be.

APHA Stock Takes a Writedown-Driven Hit

Beyond results, the Q3 release offered two more pieces of data, neither of which looks particularly positive for Aphria stock. First, it took a C$50 million impairment on assets acquired in Latin America. Those assets were purchased just last year — and were the subject of an investigation by short-sellers who claimed company insiders had inflated the purchase prices, and benefited in the process.

APHA stock has rallied since falling on that report. But the company admitted back in February that the purchases were made “near the top of the range of observable valuation metrics.” It noted, too, that its own investigation had found that directors had undisclosed conflicts of interest during the acquisition process.

Now Aphria has written down the value of the assets by roughly 20%. The company still claims that it got a good price, citing a current C$225 million valuation against “the original agreed purchase price” of about C$195 million. But in a cannabis market that has soared since, a decent deal doesn’t look quite as attractive. And with the company attributing the write-down to lower-than-expected margins from the business — just a few quarters after those deals closed — there’s an obvious worry that more bad news is on the way.