Is Aphria (TSX:APHA) a Risky Overvalued Play on Marijuana?

There are signs that Aphria Inc. (TSX:APHA)(NYSE:APHA) could be the most realistically valued of all major cannabis stocks.

edit Jars of marijuana

Image source: Getty Images

After a scathing research report from Quintessential Capital Management that called Aphria (TSX:APHA)(NYSE:APHA) a “shell game with a cannabis business on the side” the market value of Canada’s second largest marijuana cultivator collapsed.

Since then Aphria’s stock has recovered, rising by 17% since the start of 2019, which still sees it trailing well behind the likes of Canopy Growth and Aurora Cannabis, which have firmed by a whopping 69% and 63%, respectively, over the same period.

This, along with moves by Aphria’s management to ‘right the ship’ combined with the assumed massive growth potential of the global cannabis market has sparked considerable speculation that the marijuana cultivator is undervalued. That is despite infamous short-seller Andrew Left expressing considerable doubts about Canadian marijuana stocks and their nose-bleed valuations.

Lower market value than its peers

Aphria appears significantly cheaper than many of its peers. It is trading with a price that is 19 times its sales and 22 times forecast 2019 earnings compared to Canopy Growth’s price to sales ratio of 140 and negative forward price to earnings ratio.

Analysts from a range of institutions are estimating that the global legal marijuana market will expand at a compound annual growth rate (CAGR) of around 35% between now and 2025 to be worth up US$146 billion.

For the fiscal third quarter 2019, Aphria reported net revenue of $73.6 million, which was over three-times higher than the previous quarter and an impressive seven-times greater than a year earlier.

That incredible sales growth can be attributed to the cultivator aggressively expanding its operations and ramping up the production capacity of is operations over the last year.

If it is assumed that Aphria can grow sales at the same pace as predicted for the legal global marijuana market, which is feasible because of its operational scale and international presence, then based on its latest quarterly revenue annual net-sales will be worth somewhere around $462 million by the end of 2020.

While much of this is guesswork, in an earlier article on Canopy, I used a price-to-sales ratio of two, which appears appropriate for a cannabis cultivator. On that basis, Aphria’s market cap using the projected figures above would be around $924 million, which is around two-and-a-half times less than its current market cap of $2.3 billion.

While this indicates that Aphria is still overvalued, it is certainly not in the nosebleed territory inhabited by the likes of Canopy and other major marijuana cultivators. There is every sign that if analysts’ forecasts regarding the growth of the domestic and global legal cannabis are realistic Aphria could close that valuation gap.

Improved operational focus

Aphria has also made significant headway with resolving the issues raised by Quintessential Capital, which saw CEO Vic Neufeld and cofounder Cole Cacciavillani step down from their executive roles and retire from the company.

Aphria also took a hit some big hits on its fiscal third-quarter 2019 results, including a non-cash impairment charge of $50 million against the value of the Latin American assets acquired in the $280 million deal in 2018. It was that acquisition that was at the centre of Quintessential Capital’s allegations.

There is the potential for further impairment charges for those assets despite Aphria’s special committee determining in February 2019 that they exist, are developing according to the company’s plans and that the consideration paid was reasonable.

This is because the legal marijuana industry is highly speculative and immature plus those Latin American assets have yet to prove their operational viability, which means there is no proven data available that can be used to accurately value assets.

What does it mean for investors?

Nonetheless, it does appear that the worst is behind Aphria and that the company is in the process of clearing the decks as well as improving its operations. While there is most certainly further pain ahead, the combination of a more realistic market valuation, Aphria’s renewed focus on operational improvement and enhanced management oversight does increase its appeal as a speculative play on marijuana.

If Aphria can convince the market that it has put all of the issues raised by Quintessential Capital behind it, then its stock will soar once again.

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 Matt Smith has no position in any of the stocks mentioned.

More on Cannabis Stocks

A cannabis plant grows.
Cannabis Stocks

TLRY Stock: Here’s What’s Coming in 2023

Tilray Inc. (TSX:TLRY) is geared up for big growth this decade and looks like one of the top cannabis stocks…

Read more »

A person holds a small glass jar of marijuana.
Cannabis Stocks

Canopy Growth Stock: Here’s What’s Coming in 2023

Canopy Growth stock has made a lot of new moves in the last few months, but where is the company…

Read more »

A cannabis plant grows.
Cannabis Stocks

Better Cannabis Buy: Canopy Growth Stock or Tilray?

Only two TSX weed stocks can deliver substantial returns in the highly anticipated growth of the global cannabis market.

Read more »

Medicinal research is conducted on cannabis.
Cannabis Stocks

Is Tilray Stock a Buy in January 2023?

Tilray stock has lost 50% of its value in the last 12 months, in line with its peers.

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Are Cannabis Stocks Still a Thing in 2023?

The whole question of whether cannabis stocks are still relevant in 2023 is an interesting one. Here's my take on…

Read more »

A cannabis plant grows.
Cannabis Stocks

Why Canopy Growth Stock Fell 72% Last Year

Canopy Growth stock is a beaten-up cannabis giant that is trading at a discount compared to historical multiples. But is…

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Is SNDL Stock a Buy in January 2023?

SNDL is among the worst-performing cannabis stocks in the last three years. But is SNDL stock a buy right now?

Read more »

a person watches a downward arrow crash through the floor
Cannabis Stocks

Why Tilray Stock Fell Almost 60% in 2022

Tilray is a Canadian cannabis stock that is down 93% from all-time highs. Let's see if TLRY stock is a…

Read more »