Aphria Inc.’s (TSX:APH) stock plummeted more than 7% in yesterday’s trading and has plummeted 44% since the beginning of this year, a fall that has hurt investors that got into the stock at that time.
To balance this, investors who got into the stock in the beginning of 2017 are sitting pretty, with the stock more than doubling since then.
But is the stock gearing up for a comeback or will it take a lot of time, stress, and losses before reverting to early 2018 levels?
Should we buy the hype?
Let’s look at these questions with a focus on the company’s latest earnings release, which revealed a few things, some of them good and some of them not so good.
The old adage, “buy the rumour, sell the news” comes to mind.
The market has bought into the hype regarding marijuana stocks and then some. And while the legalization of a criminal substance that is helpful to many is an exciting business prospect for cannabis stocks, it also represents a totally new industry, and there are likely many unexpected challenges ahead.
But the stocks seem to only be factoring in success. What if demand is not as strong as these stocks are pricing in? What if the supply coming on-stream is too much? What if there are regulatory delays?
Thus, while the recreational market potential is undoubtedly big, everything seems like a sure thing at this time. What we commonly see in equity markets is speculation that often overshoots; once the news is actually announced, the market adjusts its positions, causing the stocks to fall.
So while third quarter fiscal 2018 results show that Aphria’s revenue growth continues to be strong, coming in at more than 100% year-over-year and 20% sequentially, and reported net income that increased more than 200% to more than $12 million, there’s more to the story.
If we look more closely at the income statement, we can see that the company only made a profit because of gains on the sale of Liberty Health, as well as gains on long-term investments.
The expansion and inventory build ahead of recreational legalization continues at Aphria, with fourth-quarter expansion plans on track.
Aphria One, a 700,000 square foot project, remains on time, with its first sale expected in January 2019.
Aphria Diamond, a 1,300,000 square foot project, also remains on time, with its first sale also expected in January 2019.
This ramp up represents a period of accelerated growth, and the question of the effect this will have on margins and costs remains key.
The cash flow statement shows that $195 million in equity was raised and this was the capital infusion that the company needs to sustain its growth.
Aphria issued shares in January at a price of $13.75 per share. The stock is currently trading 17.5% lower than the issue price.
In conclusion, I will come back to valuation.
Like other marijuana stocks, Aphria is trading at sky-high valuations. At 100 times price to sales and 97 times price to cash flow, the shares are probably headed for continued weakness until the fundamentals catch up to valuation.
