Do Aphria Inc.’s Q4 Results Indicate a Buy?

Aphria Inc. (TSX:APH) just had a stellar Q4; however, should investors be buying it at these levels?

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

On July 12, 2017, Aphria Inc. (TSX:APH) reported its fourth-quarter results, and the company hit one out of the park. For the seventh consecutive quarter, the company generated a positive EBITDA with an increase of 181% over the previous quarter and a 962% increase over the past year!

Although this is incredible growth, the EBITDA only amounted to $2.8 million, and the stock is currently trading at a whopping price-to-earnings ratio of 212. Therefore, does it make sense to overpay for a small-cap company that has a valuation built on the anticipated recreational marijuana market?

There’s no doubt that the valuations of Aphria and other marijuana producers are too high based on traditional valuation methods. However, the potential recreational market provides an extremely rare opportunity. Lifting the prohibition of the most used illegal substance could result in significant gains for investors.

However, like any investment, it’s critical that investors understand the potential risks associated with an investment before putting money into the market. Two of the biggest issues that Aphria and other producers face are

  1. The illicit market: Will illegal suppliers be able to undercut legal producers?
  2. Provincial regulations: How will it be sold in each province?

Here’s how both of these issues will affect Aphria.

Illicit market

Fortunately for Aphria, it’s in the best position among producers to outlast the illicit market. The company has established itself as a low-cost producer and is continually improving its margins. In the last quarter alone, the company was able to reduce its all-in costs by 25%, bringing its all-in production costs to $1.67 per gram.

With the average price of marijuana sitting at $9.12 per gram in Canada, Aphria has significant room to remain profitable, even if the illicit market tries to undercut legal producers.

Provincial regulation

Unfortunately, there is little transparency over this issue, as there has been backlash from provincial legislation as to how marijuana will be sold, regulated, and policed at the provincial level. However, I believe this isn’t as much of an issue for producers as people think.

At the end of day, the supply and demand is there, and there should be enough momentum to eventually push this through. Since Aphria is at the supply end of the chain, it should be able to continue to sell its product as long as the demand continues to be there.

Whether marijuana is sold at convenience stores, liquor stores, or only online, Aphria will be able to find a way to get its product to customers. It just may take some time to determine how it will be eventually sold at the provincial level.

Foolish bottom line

I firmly believe that Aphria has a “good thing growing” and is in the best position among publicly traded producers to succeed in the recreational market. However, this is still a risky venture, and it could take some time for the recreational market to come to fruition.

Therefore, if you do decide to “take a puff” of Aphria, make sure you can handle the short-term volatility and maintain a long-term view.

Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Colin Beck owns shares in Aphria Inc.

More on Investing

Dividend Stocks

TFSA Passive Income: 3 Undervalued, High-Yield TSX Dividend Stocks to Buy Now

These top TSX dividend stocks with high yields now look attractive to buy for TFSA passive income.

Read more »

Growing plant shoots on coins

Got $500? 3 Ridiculously Cheap Growth Stocks That Could Help You Retire Rich

These three growth stocks are hard to ignore at today’s prices. With just $500, investors can own all three companies…

Read more »

Electricity high voltage pole and sky
Dividend Stocks

2 High-Dividend TSX Utilities Stocks to Buy Today

The TSX utility sector has some great high-yield stocks to buy.

Read more »

A close up image of Canadian $20 Dollar bills

Canadians: A Top Passive Investment for Big Passive Income

BMO Canadian High Dividend Covered Call ETF (TSX:ZWC) is a top passive-income play for Canadians to buy on recent weakness.

Read more »

Retirement plan
Dividend Stocks

Retirement Planning: Now Is the Time to Buy Dividend Stocks

2022 could be a great time to buy quality dividend stocks at attractive discounts. Prioritize your capital allocation now.

Read more »

Payday ringed on a calendar
Dividend Stocks

How to Convert $500 Monthly Investment Into $200 Monthly Income

If you want the stock market to give you regular monthly income, you have to invest in the stock market…

Read more »

falling red arrow and lifting

RRSP Investors: 3 Dividend Stocks to Buy on the Dip

Inflation has delayed retirement for Canadians. RRSP investors should buy cheap dividend stocks like Fortis Inc. (TSX:FTS)(NYSE:FTS).

Read more »

Growth from coins
Tech Stocks

Got $1,000? Buy These 3 Under-$20 Growth Stocks to Earn Higher Returns

These under-$20 growth stocks can deliver solid returns in the long run.

Read more »