Were the value of a marijuana stock only based on how it recently performed, The Hydropothecary Corporation (NASDAQOTH:HYYDF) would beat Aphria (NASDAQOTH:APHQF) hands down. While the share price of Hydropothecary this year has already risen beyond 25%, Aphria’s stock this year, on the other hand, has dropped by roughly one-third.
Clearly, the smartest method for choosing winning marijuana stock investments involves more than a stock’s recent performance.
It’s equally as important for investors to evaluate the fundamentals of a stock’s business model, as well as its prospects for growth and potential for generating solid returns over the long haul. In doing this research, an investor is in a better position to decide between stocks.
Taking these additional factors into consideration, here’s a closer look at how The Hydopothecary and Aphria measure up as competitors.
The case for choosing Aphria as a marijuana stock to buy now:
No investor in his or her right mind would choose to buy a company’s stock when it has a market cap of US$2.2 billion and its most recent quarter’s revenue was a mere CA$10.3 million. However, if the company’s growth prospects were remarkable, as is the case for Aphria, an investor might overlook current revenue and market cap. Prospects for future growth, after all, are weighted far more heavily than market cap and sales.
So, what are Aphria’s prospects for future growth? The answer to that is three-fold. The first variable, however, involves Aphria’s prospects of continuing its pattern of strong growth in Canada’s medical marijuana market. This market is expected to exceed CA$1 billion over the next several years.
The greater potential for growth, though, will be found in Canada’s new market for recreational marijuana. As of October this year, Canada’s legal sales of adult-use cannabis will commence, with a market size estimated between CA$4 billion and CA$10 billion, or more, per year.
The international MMJ market, however, is where the largest prize awaits. While a wide variation of estimates for market size have been offered, one of the more objective estimates may be that of BDS Analytics, a cannabis market research firm. This firm projected the global MMJ market may be around US$57 billion within the next ten years.
The likelihood of Aphria claiming a large share of these global markets is high, given the company’s international presence in these markets, Germany’s in particular, has already been established and continues to grow. On the retail end, Aphria has a solid partner in Southern Glaziers on the home front, one of North America’s largest distributors of wine and spirits. With Aphria set to produce an annual 225,000 kilograms of marijuana, this retail partnership and the company’s global market presence should help tremendously with distributing its large yield.
The case for choosing The Hydropothecary as a marijuana stock to invest in:
The Hydropothecary not only has a more modest market cap of just over $750 million, but, its sales are far lower, with the latest quarter generating almost CA$1.2 million. Nevertheless, as with Aphria, the future is where the potential investment lies.
The company’s growth strategy spans three years. The Hydropothecary plans to focus its first year on growing in both the MMJ and recreational markets close to home, where it’s based in Quebec, while also expanding into the provinces of Alberta, Ontario and Manitoba. By the second year, a British Columbia expansion should be in the works. The third year is reserved for further international expansion where The Hydropothecary will launch itself into selected global markets. The company’s first priority, however, is to establish itself domestically through large-scale distribution.
The first two phases of this strategy seem achievable. By March next year, The Hydropothecary expects its annual production capacity to be up to 108,000 kilograms. To its benefit, the grower has been able to keep operational costs low, growing cannabis for an average cost of CA$0.97 per gram, according to its latest quarter. On the recreational front, for the first year of recreational sales in Canada the company will have a market share of 35%, thanks to a five-year supply deal arranged with Quebec.
The most looming challenge of the company’s strategy will likely be negotiating successful expansion into MMJ’s global markets. However, if global demand is as high as some of these analysts’ predictions, the capacity and low operational costs may be enough to make The Hydropothecary a global, as well as domestic, success.
All things considered, which cannabis stock is the better choice?
First off, without achieving tremendous growth, both Aphria and The Hydropothecary look like extremely expensive stocks. What makes The Hydropothecary’s stock a better valuation, more or less, is it should offer roughly half of Aphria’s capacity with a market cap of only one-third.
As has been discussed here, however, is the more important long-term growth potential and the company’s ability to pull it off. Here, Aphria seems to have the advantage. Aphria has a head start in establishing an international presence, thanks in large part to its Nuuvera acquisition earlier on in the year, which gave the company access to the thriving German market, among others. In contrast, The Hydropothecary may be too far behind, especially if plans for international expansion won’t occur for several years.
Investors who choose Aphria will want to see the company seizing as many lucrative domestic and global opportunities as it can in order to justify the high price tag. There is always the possibility Aphria will not be successful. But ,the company does seem better positioned to sustain growth, and at an increasing pace, compared to The Hydropothecary.
(For related news, read This Virtually Unknown Weed Stock Just Landed the Largest Supply Agreement in Canada.)