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Should Aphria’s (TSX:APHA) Recent Profits Give Canopy Growth (TSX:WEED) Investors Hope?

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Last week, Aphria Inc (TSX:APHA)(NYSE:APHA) surprised everyone after posting its second consecutive profitable quarter. The quarter, which saw $16.4 in net income and $3.9 million in operating income, was taken as a positive by most investors–analysts were expecting a $0.02 per share loss.

Although Aphria outperformed earnings expectations, the quarter disappointed on other metrics. Revenue, for example, was down about $2 million from the prior quarter.

Nonetheless, the company’s surprise profits have offered hope that cannabis companies can turn things around to become profitable in the near future.

Which brings us to Canopy Growth Corp (TSX:WEED)(NYSE:CGC). Its most recent quarter was in stark contrast to Aphria’s, with a $1.23 billion net loss and about $100 million in operating losses.

Between those losses and the firing of CEO Bruce Linton, Canopy shares have been getting hit hard. But could theShould Aphria’s (TSX:APHA) (USA) Recent Profits Give Canopy Growth (TSX:WEED) (USA) Investors Hope? good news from Aphria be a positive sign for Canopy shareholders hoping for things to turn around?

How Aphria pulled it off

Before we answer the question of whether Canopy could pull off an Aphria-like quarter in the future, we need to ask how Aphria pulled off theirs in the first place.

It turns out that a big part of it comes from an acquisition the company made last year.

In Q1, about $95 million of Aphria’s $126 million in revenue came from distribution. This is a new service for the company that came directly from its subsidiary, CC Pharma.

It’s a unique business model in which the company makes money by distributing medical cannabis (among other things) to pharmacies. This segment contributed about $3.9 million in profit to Aphria in Q1.

Why Canopy is different

If distribution is source of both revenue and profits for Aphria, then that should be good news for other cannabis companies with similar business models.

Unfortunately, Canopy has no comparable business.

CC Pharma is a fairly unique business, and to date, Canopy hasn’t acquired any company that does the same thing. This means that, to the extent that CC Pharma helped power Aphria’s recent profits, Canopy can’t count on a similar boost.

On a positive note, Aphria’s cannabis operations were themselves profitable–in fact, they had a higher gross margin than the distribution business (49% vs 12%).

But without the distribution business, profits would have been lower, and Canopy’s grow ops have nowhere near the level earnings that Aphria’s do.

Even if you take the extinguishment of warrants out of the equation, Canopy lost about $120 million in its most recent quarter. That means that the company will need to either cut costs or find a very low-cost way to boost revenue before it can become profitable.

Foolish takeaway

Aphria has been the standout marijuana company of 2019 in terms of profitability, and it looks like it’s going to remain that way. With Canopy and Aurora still posting enormous losses, there’s just no big producer in town that’s set to catch up on earnings.

There are some small weed stocks that are doing pretty well, but that’s because they’ve foregone market share and the expenses that come with capturing it. For now, it looks like Aphria is the only company striking a balance between size and profitability.

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 Andrew Button has no position in any of the stocks mentioned.

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