Last year wasn’t encouraging for investors in cannabis stocks. And despite the company’s comparatively strong revenues, Aphria (NYSE:APHA) stock was collateral damage as risk-off sentiment dragged the sector lower. The so-called Cannabis 2.0, in which edibles and vaping products were expected to drive marijuana-market revenues in Canada in late 2019, simply didn’t pan out and investors punished practically every pot stock in sight.
Jan. 14’s earnings announcement will mark the next chapter in the ongoing development of Aphria stock. However, I’m looking beyond January and past Cannabis 2.0 to a brighter future for this bold and ambitious company. If the share-price decline of more than 21% over the past year represents anything, it’s a chance to own shares at a reasonable valuation and capitalize on Aphria’s potential as a crown jewel among Canadian cannabis contenders.
APHA Stock Gets a Nod of Approval
Analyst optimism isn’t my number-one buy signal by any means. But a good word from a prominent financial firm certainly doesn’t hurt. In the case of Aphria stock, analytics firm Jefferies bestowed the honor of naming it their top cannabis-sector pick — not a minor feat amid a crowded sector.
With that, Jefferies also raised their price target for APHA stock from $8.30 to $8.40, citing “strong Canadian medical marijuana business, branding in the recreational market, and U.S. potential.” I tend to concur with this sentiment, adding that Aphria never really needed Cannabis 2.0 to be a huge success; the company’s revenues would undoubtedly benefit from expansion in the edibles and vaping sub-niches. But, the APHA stock price never depended on that.
Not every analytic firm has been as effusive as Jefferies, mind you. Pablo Zuanic of Cantor Fitzgerald, for instance, cut his price target on APHA from $8.02 to $7.63; however, he did maintain his overweight rating on the stock. Note that Zuanic’s forecast depends on lackluster global sales:
“We continue to assume flat med sales at $8.8Mn, and no international sales (for now).”
As I see it, the assumption of flat sales is far from assured.
A positive surprise could force Zuanic and other analysts to revise their predictions, while (hopefully) propelling the share price higher.
Standing Out with Consistent Profits
Back-to-back profitable quarters might not be a notable feat in the world of blue-chips. However, among cannabis companies, it’s a banner achievement.
For the first fiscal quarter of 2020, Aphria attained this and blew analyst expectations out of the water; thereby separating itself from the pack of cannabis companies with uncertain profit profiles.
While the analyst consensus was that Aphria would report a per-share loss of CA$0.02 in that quarter, the company made the critics look foolish with a gain of CA$0.07 per share; the previous quarter’s gain had been CA$0.05 per share. Also impressively, the first fiscal quarter revenues came to CA$126.1 million while the net income was CA$15.8 million.
These were unusual results within the cannabis sector. And analysts had little choice but to raise the expectations for the next earnings announcement. Specifically, the analyst consensus estimate is CA$130.3 million, representing a 3.3% increase over the actual results from the first fiscal quarter.
Though it might move the Aphira stock price in the short term, it’s ultimately of little consequence whether the company’s posted result matches the expectation of CA$130.3 million in revenues. My focus is on the expansion and market share of the company itself. And Aphria remains a practically peerless power player with 255,000 kilograms of expected annual cannabis-product output and an astounding 1,300,000-square-foot production space in the company’s Leamington greenhouse facility.
The Takeaway on Aphria Stock
I must admit, I couldn’t care less whether Aphria stock ranks as number one or number 101 on Jefferies’ list of their top cannabis-stock picks. To be perfectly frank, moreover, I hope that you’re not basing your trading decisions on analysts’ opinions. Even if those analysts have decent track records.
Of much greater consequence is Aphria’s ability to deliver results and stay several steps ahead of its competitors. Two consecutive positive earnings surprises made some appointed “experts” look silly, and a third surprise might be in the cards. Yet, it wouldn’t surprise me if Aphria stock recovers what it lost in 2019 — and much more.