While Aphria Inc (TSX:APHA) stock has taken a beating this year (along with the rest of the cannabis sector), shares of this company could be set to take off based on a few solid business fundamentals.
For starters, the company recently announced that it would be doubling production capacity courtesy of the recent cultivation license it obtained for Aphria Diamond, a subsidiary of which Aphria owns 51%, with Double Diamond owning the remainder.
The Aphria Diamond greenhouse space spans 1,300,000 square feet and can grow 140,000 kg of marijuana per year. This puts Aphria’s total production space at 2,400,000 square feet, setting up the company to produce 255,000kg of cannabis per year.
The new facility also provides “industry-scale automation technology,” meaning that the automation will be able to handle several tasks such as: transporting plants, trimming, waste disposal and more.
This is a great way for a producer like Aphria to lower margins, since the battle for margin has plagued a legal cannabis industry mired by black market competition.
While the company achieved a modest gross margin of 22% in its most recent quarter, this new development could help the company improve on costs and generate stronger, more sustainable profits in the future.
And although APHA faces the same industry headwinds as its industry peers (i.e. the cannabis oversupply dilemma and the vape-related illness crisis), some investors are confident that Aphria will come out of this smelling like rosebuds (or dank buds).
Aphria is teed up for Rec 2.0
Like the majority of other major cannabis players, Aphria is waiting on Canada’s Rec 2.0 like Christmas. And rightfully so. The entire world has been waiting for Canada to finally legalize cannabis edibles and derivatives for recreational use.
And like most of its peers, Aphria is poised with an array of products ranging from vape pens to gummy candies.
Recent developments look promising
Last month, Aphria sold 37 million shares of Australian-based Althea. While the timing of the sale seemed to have caught many investors off guard (as investment money seems to be pouring into the Australian cannabis market, versus the other way around), this is actually a positive signal from Aphria.
By unloading its majority stake of Althea, APHA has signaled that it’s now preserving cash on hand and no longer needs to seek growth by expanding its global footprint. The company now has $464 million in cash and marketable securities.
In fiscal Q1, APHA reported a growth in net revenue for adult-use cannabis of 8%, with total net revenue growing 849% from last year.
The company forecasts an annualized revenue of CA$500 million in Canadian marijuana. By the calendar year-end 2020, the company anticipates an annualized revenue of CA$1 billion.
The company’s forward price-earnings (PE) ratio hovers at around 26.9, which is lower than the price-sales ratios of many high-profile cannabis stocks. It’s also important to note that on average, analysts expect the APHA profits to shoot up 171.4% this year, and 400% the following.
Canaccord Genuity predicts that Aphria will obtain a 12% share of Canada’s recreational market and become the country’s third-largest grower, trailing only Canopy Growth (CGC) and Aurora Cannabis (ACB).
Aphria Inc. (APHA) was trading at $4.54 per share on Wednesday morning, up $0.23 (+5.34%). Year-to-date, APHA has declined N/A%, versus a 17.15% rise in the benchmark S&P 500 index during the same period.