Last week, cannabis stocks like Canopy Growth (NYSE:) and Tilray (NASDAQ:) enjoyed a rebound for no reason. Aphria (NYSE:), which focuses primarily on the medical cannabis market, did not bounce back. But after a strong quarterly report confirmed the business is improving, APHA stock may potentially reverse 2019’s downtrend.
On Oct. 23, Aphria 37 million shares of Australian-based Althea. The timing is unusual since cannabis regulations are favorable. Althea’s prospects in the region continue to improve.
Selling its majority stake is a positive development for Aphria. It signals the company is now preserving its cash on hand and does not need to find growth by expanding globally. Still, Aphria invested just $2.5 million CAD in last year. So, the sale should help management keep its focus on growth.
Strong First-Quarter Results
In its fiscal first quarter, Aphria reported net revenue for adult-use cannabis growing 8%. Its consolidated adjusted EBITDA rose four-fold while its cash position was strong. With $464 million of cash and marketable securities, Aphria stock should stabilize from here.
The company may effectively invest in sustainable profit growth without selling shares or issuing debt. Similarly, Canopy Growth has a healthy cash balance. Yet that $4 billion investment from Constellation Brands (NYSE:) does not come without strings attached. Constellation ousted Canopy’s co-CEO and is pressuring Canopy to focus on profit generation. STZ stock is on a downtrend. When Canopy hired a top shareholder of Constellation Brands’ CFO as chairman, it did not help either stock.
Core Growth Priorities
Without any external influence, Aphria has the ingredients for profit growth. It has a strong team. Collectively, the team has experience in the cannabis, consumer packaged goods, beverage, and broader operational and supply chains.
In its first quarter, Aphria’s net revenue grew 849% from last year. But distribution revenue fell because the company made . In effect, changes in the reimbursement model increased gross margins and EBITDA.
APHA Stock Outlook
Aphria forecasts annualized revenue of $500 million CAD in Canadian cannabis, assuming all facilities are in full crop rotation. By the end of the calendar year 2020, the company expects annualized revenue of $1 billion CAD.
The dried flower segment remains a predominant part of Aphria’s business for now. But the vape category and new derivative products are potential growth areas. Still, Aphria’s forecast depends on new store openings in Quebec and Ontario. So if more stores open than expected, the company may raise its forecast. Aphria also has an established brand. Since it has been around for five years, this suggests that consumers will buy its brands at retail outlets.
Working capital and capital expenditures in the current quarter will not change. In future quarters, cash burn will drop. EBITDA will grow at an increasing rate as more capacity comes online. When Aphria Diamond — its with Double Diamond Farms — is ready, management expects steady costs at worst. And at best, costs will fall as Aphria grows more product in that facility.
My Takeaway on Aphria Stock
Aphria is one of the smallest cannabis plays with a market capitalization that is just under $1 billion. Yet APHA stock has good value and proven growth. Analysts are bullish with an average price target of $8.49. Profitability is improving, too. Soon, analysts will have to revise their earnings per share estimates higher. As its facilities come online and more stores open, Aphria’s revenue growth will improve and profits will come sooner.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.