To state the obvious, this has, so far, been a year of great change for marijuana stock Aphria (NASDAQOTH:APHQF).
Among the changes this marijuana stock has seen in 2018 are high profile acquisitions, controversy and scaling back U.S. operations.
The major Canadian cannabis grower’s two acquisitions this year – Nuuvera and Broken Coast Cannabis – made the list of the marijuana industry’s top five acquisitions ever. Of the two transactions, the Nuuvera acquisition sparked a great deal of controversy; the management team for Aphria came under fire for its failure, on the outset, to disclose the personal stakes it had already invested in Nuuvera. Then, as the Toronto Stock Exchange threatened delisting of marijuana stocks failing to meet revised requirements for operating in the United States, the company responded by decreasing its American operations.
It’s a wonder that, with all these changes, Aphria has been able to maintain its focus on what has been the company’s core: its medical marijuana business. However, Aphria proved just what it has to offer with the delivery of its Q3 results this week (for the quarter ending February 28).
From the Q3 results, there are three items investors can celebrate regarding Aphria’s ongoing status as one of the top marijuana stocks to invest in.
1. The revenue for this marijuana business reached a record high.
Aphria’s third quarter revenue reached an all-time high of CA$10.3 million (or $8.2 million USD). This reflected not only a 20% increase from Aphria’s Q2, but, a near doubling of revenue from the prior year.
The company’s significant revenue growth can be attributed to two factors. First, Aphria had a noteworthy increase in MMJ sales to patients as well as a spike in wholesale shipments. Second, Aphria was able to include February sales from Broken Coast in its Q3 total, thanks to the acquisition closing in a timely manner.
In other areas of growth, the company has also been on fire. Positive adjusted EBITDA has been a steady asset for Aphria, occurring ten consecutive quarters as of Q3. In the latest quarter, Aphria reported CA$2.9 million in adjusted EBITDA – a 238% increase year over year. In addition, Aphria set a company record for net income in Q3 at CA$12.9 million. The marijuana business also gained on some of the shares it had divested in Liberty Health Sciences, focused on the legal marijuana market in the United States; together with higher revenue, this gain boosted Aphria’s bottom line.
2. Aphria marijuana stock has a robust cash position.
The company’s stockpile of cash grew this past quarter thanks to its completion of bought-deal financing transactions. As of the end of the quarter, Aphria’s reported stockpile (i.e., cash, cash equivalents and marketable securities) totaled CA$173.7 million.
Aphria’s CEO Vic Neufeld suggested this robust cash position will allow the company “flexibility to pursue attractive investment opportunities both domestically and around the world.”
Not surprisingly, what Aphria isn’t planning on doing with its cash stockpile is paying down debt. While the marijuana business has total long-term debt around CA$29.5 million, its interest rates remain comparatively low. Since servicing its debt is a relatively low cost, the company can utilize its cash position for strategic acquisitions should more opportunities arise.
3. Aphria’s marijuana business boasts huge production capacity.
Some of the details reported in Aphria’s third quarter results, though not in direct relation to financial performance, should have a significant impact on the company’s future performance.
Production capacity is one of those important details. Aphria’s two expansion projects remain on schedule, as of the Q3 report, and both anticipate their first cannabis sales by January 2019. The company’s Aphria One facility is undergoing a 700,000 square foot expansion while its Aphria Diamond facility has a 1.3 million square foot retrofit underway.
Meanwhile, Broken Coast awaits a cultivation license, having completed phase 3 of its expansion. Aphria’s revision of the phase 4 facility expansion, though likely pushing first sales back to fall of next year, will include more growing space.
CEO Neufeld expects these expansion projects will ensure Aphria has more than enough capacity to meet demand, not only domestically in Canada, but, also in international markets.
Most important among these developments, marijuana stock business Aphria awaits Canada’s expected legalization of recreational use marijuana.
Should everything stay on track politically, Canada’s Senate should pass legislation to legalize recreational use marijuana at the final vote this June. Following, provinces would have several months to finish preparations for retail sales, meaning the new market should open around September.
What investors will want to monitor is the demand for recreational marijuana in comparison to the supply. In anticipation of Canada’s domestic demand, Aphria has worked aggressively, along with other cannabis growers, to increase production capacity. The potential – and some say, inevitable – problem is oversupply.
While oversupply is a huge concern on a domestic level, investors are encouraged to also closely watch the growth of MMJ markets internationally, especially Germany. With these markets growing, the excess capacity after supplying the domestic market may be absorbed among international markets.
The Trump-Gardner deal announced last week may also play a significant role in marijuana stock Aphria’s longer-term growth.
Senator Cory Gardner (R-Colo.) struck a deal last week with President Trump, ensuring the U.S. federal government returns to a no-interference stance in states where marijuana has been legalized. Gardner also implied Trump may support legislation in the future to bring permanent change to the issue through U.S. federal laws. The unimpeded growth of the legal U.S. marijuana industry, for the time being, is largely dependent on whether or not Trump upholds his promise.
What this means for Aphria is, should federal laws change, the company could reinvest in the U.S. market and more expansively than before. Investors should keep in mind anything to do with the political process is a wild card, making this growth prospect for Aphria the least certain of all.
(For more political news, read Are Marijuana Stocks About to Skyrocket? Trump Choose to Back States over Sessions.)