Is Aphria (APHA) a Buy Under $3?

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March 9, 2020 1:31pm NYSE:MJ

NYSE:MJ | News, Ratings, and Charts

In 2019, many big names in the cannabis industry were failing to meet up to their profit projections, except for one… Aphria (APHA).  In January 2020, Aphria announced it’s third consecutive quarter of positive adjusted EBITDA.  As a result, their stock showed strength while many of its peers fell to 52-week lows.

However, when news of the spread of the coronavirus around the globe hit the financial markets in February 2020, APHA wasn’t immune.  Currently shares of the company are trading at 52-week lows, below $3.

Which leads to the question — is Aphria a good buy at this lower price?

The COVID-19 virus is disrupting supply chains all over the world. To make things worse, there are predictions that this disruption could go on for the foreseeable future. This is largely because China, the epicenter of the virus, is the producer of a significant amount of the world’s consumer packaged goods. As such, China delaying, reducing, or even temporarily stopping output can profoundly impact the marijuana industry.

Companies that are legally allowed to sell and distribute marijuana, like Aphria, are largely dependent on China. They depend on the country for major parts of their vape pens. This dependency poses challenges for companies like Aphria. To make reasonable profits, there have to be products with high margins like vapes to help increase sales.

While Aphria has not announced a delay in the launch of Cannabis 2.0 products, it is quite evident that the issue of the coronavirus is worrisome and could affect profits. 

There are 2 key pieces of information I will be focusing on, concerning Aphria.

First, the company has to effectively manage the expense base, alongside the actual demand of the consumers. This is particularly important because they don’t have a large pool of inventories. In 2019, even with their impressive performance in the market, the company still had inventory issues. 

Due to the problem with inventories in 2019, they were only able to sell about 7000+ kilograms of cannabis. However, now, they can cultivate over sixty-three thousand kilograms per quarter. APHA must effectively manage the expense base alongside the actual demand of the consumers.

Secondly, APHA has to maintain the previous strength of their balance sheet. In their last quarter, they were able to get up to 500 hundred million Canadian Dollars and an extra hundred from an investor in January. This was when prices were much higher. Because of their potential for higher levels of cultivation this year, stemming from their newly constructed Diamond facility, they have an even better chance of ramping up production. If they are able to do so successfully and maintain, or better yet, improve the strength of their balance sheets, they could be well on their way to getting strong results.

My belief is that even though Aphria has significant challenges ahead of it in 2020, they are still a strong cannabis company. As such, while it is risky to invest in almost any stock in the current environment, when it comes to APHA, I am optimistic they will weather this storm.

Aphria Inc. (APHA) was trading at $2.93 per share on Monday afternoon, down $0.22 (-6.98%). Year-to-date, APHA has declined N/A%, versus a 5.10% rise in the benchmark S&P 500 index during the same period.

About the Author: Zohar King

Zohar KingZohar King is an accomplished journalist providing in-depth insights to his readers for nearly a decade. Over the past several years his focus has been on the cannabis industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends, with the goal of helping investors make well-informed decisions.

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