At the beginning of last month, Aphria (NYSE:APHA) was on top of the world. The cannabis company’s fiscal fourth quarter revenue blew past estimates, catapulting Aphria stock higher by more than 40%. Investors were elated.
APHA stock is now down 10% from that peak and seemingly still drifting lower. So much for the notion that one of the pot industry’s rare profitable companies is a must-own name.
There’s more to the setback than just a little bad luck though. The immediate evaporation of all that enthusiasm is an indication of just how unconfident the market is in Aphria. Ditto for its peers, which have performed similarly poorly for the same timeframe.
The frustrating part is, this particular stock actually deserves a little more credit than it’s getting.
Aphria Stock Fails to Launch
As a refresher, last quarter’s top line of $128.6 million easily topped estimates of $97.8 million. The bulk of that figure was contributed by the acquisition of an existing distribution business in Europe, called CC Pharma.
Canadian sales of recreational marijuana only came to $18.5 million, though that figure was still up 85% year-over-year.
Most noteworthy of all, Aphria turned a profit of five (Canadian) cents per share. Even the most notable names in the business like Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) are still losing money.
The numbers were mostly irrelevant a couple of days after the earnings figures were posted though. That’s how long it took the post-earnings bullishness to fade. It also was more or less how long it took other cannabis stocks to come down off of their most recent post-earnings high (if they created one at all).
Although cannabis has a clear future, most of the highly-touted and highly-traded cannabis stocks are grossly overvalued compared to the kind of revenue they’ll be able to produce even in the distant future. It’s the unspoken reality most marijuana investors quietly suspect but are hesitant to voice.
The irony is, Aphria is something of an exception to that unspoken paradigm. It just doesn’t matter.
Aphria Stock Is Reasonably Valued
The widely-applied pessimism is certainly understandable. Canopy Growth lost a ton of money last quarter, even after stripping out the impact of a writedown. Tilray logged a loss last quarter too, of $31 million, tripling its loss from a year earlier and leaving investors wondering if there’s actually any money to be made in the pot business. There is, and Aphria is making some of it.
Granted, it’s not easy, and probably won’t be consistent income for a long, long while. But it’s there. Last quarter, Aphria reported an adjusted EBITDA of $1.85 million on its cannabis operations. Its distribution business, separately, added $3.87 million worth of EBITDA to the mix.
It’s not great, but it’s something. And, as Aphria scales up and gets better at what it does, the margins as measured by percentage will improve. Aphria believes they’ll start to meaningfully improve this year, in fact, forecasting an EBITDA total of between CA$88 million and $$95 million for the fiscal year that just began.
Multiplying that figure by a typical enterprise value/EBITDA figure of 14 would translate into a market cap on the order of $1.3 billion. Aphria’s is at $1.7 billion, which is more than it theoretically should be, but some tolerances have to be made for the rapid sales and EBITDA growth the company is producing.
On a price/sales basis, the market cap of $1.7 billion is a very reasonable 2.5 times this year’s expected top line of between CA$650 million and CA$700 million. That’s right around the marketwide average. And, let’s not forget that Aphria is also legitimately profitable.
Looking Ahead for Aphria Stock
Even the marijuana movement’s most enthusiastic investors struggle to say pot stocks didn’t get ahead of themselves, driven higher by hype before these companies knew everything they need to know. Much of the weakness seen since March of this year reflects the realization that simply being in the cannabis business is no assurance of success.
Right or wrong, Aphria stock is guilty by association. When most other names in the business are losing ground due to valuation concerns, the selling can be rather indiscriminate.
Aphria’s $670 million worth of goodwill sitting on the balance sheet doesn’t help either, as it could easily turn into a writedown sooner or later.
Still, APHA stock is a name worth adding to your watchlist, as it’s one of the more sensible stocks to own in a new industry that drove investors into a wild frenzy last year. The question, of course, is figuring out when that groupwide bearish pressure might finally ease up.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.
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