Shares of leading marijuana company Aphria (TSX:APHA)(NASDAQ:APHA) have been on an absolute tear this year. Aphria stock is up 220% year to date, while the Horizons Marijuana Life Sciences ETF has gained 97% as well.
Cannabis stocks have experienced an upward spiral ever since Joe Biden won the presidential race in November. It is widely expected that the Democrats will decriminalize and even legalize recreational marijuana at the federal level.
Let’s take a look at the company-specific factors that have driven the stock higher in 2021.
Aphria’s quarterly results
Last month, Aphria released its fiscal second-quarter-of-fiscal-2021 results and reported net revenue of $160.5 million. This indicated a 33% growth year over year and a sequential growth of 10%.
Aphria’s gross profit was down 47.5% due to a change in the fair value of inventory. Aphria also managed to squeeze out a profit of $3.2 million, or $0.01 per share. Comparatively, in the prior-year period, the company posted a net loss of $48.8 million. Analysts expected Aphria to post revenue of US$119.4 million and a net loss of $0.02 in Q2.
According to Aphria, the sequential revenue growth was primarily driven by higher distribution revenue from its CC Pharma, which is a medical marijuana distributor in Germany. Further, Aphria also reduced its cash cost to produce a gram of cannabis by 9% — a downward trend that has been witnessed in the last year.
The company improved its cash flow by $70 million and is well poised to report a positive free cash flow in Q3. Shortly after Aphria’s Q2 results, Stifel analyst Andrew Carter increased the stock’s target price to $15.5, up from $9.8, and maintained a neutral rating on it.
Merger with Tilray
Another major driver of Aphria stock is its upcoming merger with Tilray that is expected to close by Q2 of CY 2021. The combined company will be the largest cannabis entity by revenue. It will also help Aphria to cultivate products at a lower cost and benefit from economies of scale.
There is a good chance that the merger will take some time to pay off, but according to the management, the new entity should have pre-tax annual cost synergies totaling $78 million in the next two years after the acquisition.
The two companies have reported total sales of $874 million in the last 12 months and will account for 17.3% of the Canadian marijuana market. After the acquisition is complete, the combined entity will have a robust product portfolio that includes vapes, pre-rolls, medical cannabis oil, edibles, beverages, and flowers.
What’s next for investors?
Aphria stock is currently valued at a market cap of $8.7 billion. While its recent rally might not be sustainable, there is a good chance for the company to gain investor confidence if it can achieve profitability on a consistent basis.
In Q2, Aphria increased the amount of dried cannabis it sold by 5,000 kg, indicating the potential of a solid turnaround in the Canadian legal marijuana market.
Are you a fan of cannabis stocks like Aphria?
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.