Of the multiple positive catalysts should fuel Aphria Inc (NYSE:APHA) in the months ahead, the most intriguing one is is vaping, or using a vaporizer to get the desired effect from cannabis use. My InvestorPlace colleague Will Healy pointed out some of these catalysts in his June 6 article, when APHA stock was trading at more than 50% below its 52-week high.
The next day, Aphria announced that it had entered into a supply agreement for the Canadian market with San Francisco-based Pax Labs, a leader in the manufacture and sale of vaporizers. In the U.S. alone, Pax has sold more than 500,000 Era vaporizers to date with plenty of growth expected in the months and years ahead.
“As Aphria continues to drive the evolution of the industry, we are thrilled to partner with a technology leader like PAX to provide a new avenue for consumers to integrate cannabis into their lives,” said Irwin Simon, interim CEO of Aphria. “We are excited to bring our premium cannabis extracts from Solei, RIFF and our flagship medical cannabis brand, Aphria, to the PAX Era device and platform.”
Vaping is Going to Be Big in Canada
The vaping market in Canada is expected to be significant. Aphria estimates that vapes and concentrates will account for up to 30% of the entire adult-use market by 2021. The great thing about vaping, from Aphria’s perspective, is that concentrates provide a much higher margin than dried cannabis.
Statistics show that U.S. use of vape products is growing, while the use of dried flower is slowing. In Colorado, the use of vape products increased tremendously over three years. In 2014, vape products accounted for 12% of the legal market. By 2017, that number had grown to 23%. Meanwhile, over the same three years, the use of dried flower dropped by 12 percentage points to 54% of the market.
Between edibles, concentrates, and infused drinks, the cannabis industry is moving away from the dried flower to an industry filled with choice. The fact that Aphria is partnering with one of the premier vape companies is a sign that Simon understands the importance of moving beyond supplying dried buds.
APHA Is Not Alone
That only downside from Aphria’s announcement is that PAX pick three other Canadian cannabis producers to help sell its product: Aurora Cannabis (NYSE:ACB), OrganiGram (NASDAQ:OGI), and Supreme Cannabis (OTCMKTS:SPRWF).
However, the fact that Aphria is near completion of it $55 million Extraction Centre of Excellence in Leamington, Ontario, makes this concern far less of an issue. That’s because when completed, Aphria will have annual extraction capacity of 200,240 kilograms, making it one of the largest extractors in Canada.
Currently, analysts haven’t factored Aphria’s extraction facility into their valuation models. Once the facility is running, and products are available for sale in late December or early in 2020, Aphria stock is going to be far more attractive to investors than it is today.
Bottom Line on Aphria Stock
In May, I highlighted the pros and cons of the regime change at Aphria. As I stated, it’s hard to know if Irwin Simon’s the right person for the job. While his work at Hain Celestial (NASDAQ:HAIN) was at times exceptional, in recent years he did little to impress investors, eventually stepping down as CEO in June 2018.
Joining the Aphria Inc board in December as chairman, Simon was appointed interim CEO on March 1 after former boss Vic Neufeld retired in January. Since then, Simon’s made a few management changes to put his own stamp on the company.
The PAX announcement is a sign Simon might be sticking around as the permanent CEO. If the board didn’t have confidence in him, this kind of deal probably wouldn’t have happened.
While not completely sold on Simon, the PAX deal in combination with the completion of the extraction plant, suggests investors aren’t giving Aphria stock its due.
Aggressive investors ought to consider buying this potential growth and value play.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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