Should Investors Speculate on Aphria Stock?
Like other cannabis stocks, Aphria Inc. (NYSE: APHA)has fallen in the last few months as the stock market continue to waver. Since cannabis stocks are mostly speculative at this time, they are bound to perform worse than the overall market.
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But the 35% drop in Aphria stock in the last quarter is partly company-specific. The company issued convertible debt in April, hurting existing shareholders. The company reported a net loss for fiscal Q3, even though its sales rose.
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On Apr. 16, Aphria priced its $300 million convertible debt offering at $9.38 a share. Buyers may convert each $1,000 principal note due in 2024 for 106.5644 common shares. With APHA stock trading well below that conversion price, Aphria will benefit from the deal because buyers of the notes will not convert them in the near-term. More importantly, the company’s cash has increased. It may use the funds to cover its operating costs or make small acquisitions.
Poor Third Quarter
The bad news for the owners of APHA stock is that the company lost CAD $0.20, or USD $0.14 per share, in Q3, even though its revenue surged over six-fold year-over-year to CAD $73.58 million (USD $54.77 million). But investors will notice that the company’s higher sales are not translating to profits just yet.
During the quarter, Aphria continued construction of its EU-GMP oil processing facilities. Additionally, it recently launched CannRelief, a CBD-based nutriceutical and cosmetic line, in Germany. APHA’s overall cannabis sales fell to 2,637 kg in Q3 from 3,409 kg in Q2.
Sales volumes fell due to a drop in the company’s inventory entering the quarter. The supply shortage, changing growing methods, and packaging challenges all contributed to the lower sales. With the company addressing the operational challenges, investors should expect its sales to improve in the current quarter.
Other Challenges
ASP, or average selling price, fell to $6.32 per gram due to the company’s shift to smaller packaging. But the cost per gram of packaging increased from $1.34 to $1.48, and the total cost of the company’s cannabis increased from $2.60 to $3.76 a gram. Management said the higher packaging costs are temporary.
SG&A costs ballooned to $106 million, up from $27.5 million in Q2. The company took a $50 million impairment charge for an acquisition.
The Growth Opportunity for Aphria Stock
Like other cannabis companies, Aphria has to pay its construction costs up-front, and its projects will not result in production increases until they are completed.
Looking ahead, Aphria expects to launch two new plants in coming months, so that by September, it will have ample output to meet the strong demand from Canadian provinces. Packaging costs hurt last quarter’s results, but if Aphria introduces automates packaging, it could cut its costs. Management did not give much detail on automation during its earnings conference call.
The Bottom Line on Aphria Stock
Aphria is still in its growth phase, so it has high costs. It built up its infrastructure and is growing its sales team. Its efforts in marketing, R&D, and product development are ongoing. Assuming that the company’s revenue increases by a relatively conservative 48% annually, a 10-year DCF Growth Exit Model suggests the stock’s fair value is below Aphria stock price.
Investors should wait at least one or two more quarters before trying to estimate the value of APHA stock. By then, they will have a better idea of its revenue growth and the pace at which its costs are increasing.
As of this writing, the author did not hold a position in any of the aforementioned securities.
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