Aphria had a great quarter, but there’s more to it than meets the eye…
Could Aphria Inc. (NYSE: APHA) be the company to finally turn the cannabis market around once and for all?
We’ll have to wait and see, but it recently made a very good case as a “savior” of the industry.
Aphria reported its Q4 earnings last week, and the company absolutely exceeded all expectations.
Last quarter, the big cannabis companies in Canada showed a decline in revenues – not what you want to see from a market expected to grow to $5 billion or so from its current run-rate of less than $1 billion.
Aphria turned that around this quarter, with an amazing 85% increase in its Canadian cannabis revenue.
That’s 85% sequentially and not year-over-year. The company also turned EBITDA positive, albeit after adjustments and with help from a pharmaceutical distribution business that the company owns in Europe.
And management is optimistic looking forward.
There’s no question that this quarter was a big win for Aphria, which has a well-deserved 5-rating in the NICILytics database.
From this earnings report, it’s clear that the Canadian producers were not ready for legalization last October. The blame for the ongoing cannabis shortage in Canada has been directed at a lot of targets: producers, regulators, and retailers.
Each probably deserves some blame, and in particular, the huge delays in Ontario retail stores hurt the industry.
But it’s clear now that the producers may have been a little too confident in how much marijuana they could produce.
As companies like Aphria get better at growing cannabis, they will get better at meeting demand.
Aphria shipped more than double the amount of cannabis this quarter than it did just three months ago, and CEO Irwin Simon attributed the success to changes the company has recently made in how it produces cannabis.
December will bring about “Canada 2.0.”
That’s when Canada is currently scheduled to roll out vapes and edibles. In an interview after the call, CEO Simon claimed that there was already a $1 billion market for vapes in Canada, but that it was just currently an illicit market.
He described that illicit market as his biggest competitor.
So, with the introduction of those products by the legal producers, combined with the companies that are getting growing right, there should be significant sales increases in December and in the first quarter of next year.
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Cannabis Stock Prices Are Ready to Climb
This market wants to go up.
I wrote to our Cannabis Investor’s Report members last week that the rally I predicted turned out to be a short-lived experience because of a scandal at a Canadian producer, an FDA letter to an American CBD producer, and even because of the firing of Bruce Linton by Canopy Growth Corp. (NYSE: CGC).
These events pose a real challenge to cannabis investors, but Aphria’s results remind us all why we are invested in cannabis.
No one else grows revenue 85% in a single quarter.
When cannabis stocks recover, it will happen very quickly.
Aphria’s move of more than 30% following the earnings beat is impressive, but other rallies have been equally fast. The market increased by 80% in a month after Constellation Brands (NYSE: STZ) invested in Canopy.
Moving to New Exchanges
The big exposure of companies on major exchanges is proving to be very important.
I’ve written a lot about how getting listed to a more well-known exchange benefits a company, but what I haven’t written about is the benefits that these uplisted companies bring to the entire sector. The fact that big institutional money prefers larger exchanges means that companies with listings there get more attention than equally large companies on smaller exchanges.
For example, Aphria has three times as many institutional investors as Harvest Health and Recreation (CSE: HARV, OTC: HRVSF), which is about as big as Aphria. It’s just that listing on the CSE and the OTC limits the buying pool.
In addition to having more long-term investors, Aphria’s listing on the NYSE brings in other investors and traders because exchange-listed stocks have pre-market and post-market trading and options available on them. Harvest recently pre-announced earnings that should have had the same effect on the market as Aphria’s announcement, but that spot on the NYSE made Aphria the big winner.
Overall, there’s no question that Aphria’s quarter was big news for itself, for Canadian producers, and perhaps for the entire industry.
I hope my thoughts above can help you read between the lines when you look at other reports going forward. For your reference, I also released this free guide on how to read an earnings report like a pro.
I’m also going to have an important update about the booming Florida cannabis market this week, so make sure to check your inbox.
Executive Director, National Institute for Cannabis Investors
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7 responses to “The Important Lessons Behind Aphria’s Earnings”
August 07 2019