It’s been a struggle for marijuana producers to get investors excited in cannabis stocks again. But even as these stocks are slowly seeing an increase, Aphria (TSX:APHA)(NYSE:APHA) has struggled perhaps most of all.
That is, until January 11, when the company announced some positive financial news in its earnings report. So, with the stock still below $10 and financials looking better, is Aphria now a buy?
Drama, drama, drama
The stock has seen its fair share over the last few months. While other producers just had to worry about the demand for marijuana falling short of consumer expectations, Aphria had other problems on its radar.
First and foremost was the short-selling scandal. Sellers alleged that Aphria bought assets in Latin America at inflated prices from SOL Global Investments, another cannabis firm. The assets were deemed “largely worthless,” and only profited insiders in the process.
The accusations sent Aphria’s stock down to its 52-week low of around $5 per share and caused the CEO Vic Neufeld to step down. The stock came back a bit after the announcement but has since dropped again.
While the departure of Neufeld was necessary, analysts believe it could hurt the company in the long run. Neufeld was set up with the expertise to take this company global, perhaps more so than the other top marijuana producers. Without him, and with no clear replacement in site, the company could be lost.
Production without approval
One of the reasons Aphria could go global in the near future is because it has the capacity to produce a lot of pot. The company stated it expects to produce 255,000 kilograms of marijuana by the end of 2019.
But one barrier that stands in Aphria’s way is Health Canada. The company hoped to get approval for its Aphria One and Aphria Diamond facilities, but Health Canada has a huge backlog in these approvals. So, while the company is set up and ready to go, it’s unclear when and if those facilities will be approved.
Is the price worth it?
Compared to $58 for Canopy Growth and $72 for Tilray, this stock seems like a steal. But don’t be fooled. While the company does have a lot of future potential, it’s still just that: potential.
There are supply agreements lined up with Canada, Europe, and Latin American countries, but Aphria recently had to divest its investments in the U.S.
Then there’s this latest earnings report. The company reported revenue of $21.7 million for the last quarter, and net income of $54.8 million. Revenue missed analyst expectations of $28.8 million, and the net income was a result of gains from equity investees and long-term investments. This means these are one-time benefits, so not that the company is suddenly rising from the ashes.
Operating expenses also quadruped to $27.5 million, and Aphria is still losing money to these expenses. And while the company is looking to partner and make further acquisitions, shareholders should be wary as Aphria tends to issue stocks when making deals. This could dilute the share price in the future.
Granted, the stock is undervalued at $9, and there is absolutely the potential to be one of the top marijuana producers. Its fair share price is valued at around $11 per share, with the potential to hit between $9 and $30 per share by the end of the year.
So, you could buy this company now and in a few years be incredibly glad you did. But right now, the financial health isn’t great, and there is too much drama for investors looking for a stable buy. I’d wait for some good news and for these cases to close before investing in Aphria.
