On January 10, Aphria Inc. (TSX:APH) reported third-quarter results that showed strong year-over-year revenue growth of 63% and net income of $6.5 million, which was significantly higher than net income of $945,000 last year. This represents the fifth consecutive quarter of positive net income.
Moreover, the company’s positive cash flow from operations, although small, sets it apart from its marijuana company peers like Canopy Growth Corp. (TSX:WEED) and Aurora Cannabis Inc. (TSX:ACB), which reported cash used of $22 million and $5 million, respectively.
Yet Aphria stock is down 19% since the report. What should we make of this?
Well, to me, it clearly states that the stock’s valuation is reflecting stronger growth than what the company achieved. In other words, it’s overvalued.
Diving into the results a little deeper, we can start to get an idea of the quality.
Production costs increased to 33% of revenue from 22% of revenue last year, and gross profit margin declined to 68% from 77%. Included in the company’s net income is a gain on long-term investments in other cannabis companies, such as Kalytera Therapeutics and MassRoots Inc.
Also, an analysis of any company is not complete without analyzing its cash flow statement. For the six months ended November 2017, cash generated from operations totaled $415,000, which is down from last year.
With capital expenditures of $59 million, the shortfall was made up through issuing shares. Accordingly, shares outstanding increased almost 10% from May 2017 to November 2017, as the company went to the market again to help fund its growth and expansion plans.
With $170 million in cash and cash equivalents, and marketable securities on the company’s balance sheet, and minimal debt, we can see that it is well funded at this time. But Aphria is still in the early stages of growing the business, so capital expenditure levels will be high.
All of this is typical of a growth company. The issue I have is with valuation. The valuation does not seem to factor in risks and is all about optimism.
Aphria is trading at 122 times revenue and 120 times earnings. Sure, it can grow into this valuation, but investors need to be aware of the risks inherent in a stock with this type of valuation that operates in a new industry (albeit a very exciting one) that is fraught with uncertainties and future growing pains.
In summary, applying real, fundamental valuation parameters gives us an indication of just how richly valued Aphria’s stock is. I would personally take my profits at this point and wait on the sidelines until the valuation is more attractive, because valuation still matters.
