Consumer Products

Will a Rich War Chest Help Aphria Stock?

Marijuana stocks have been some of the hardest hit in this market downturn, and there may be more trouble ahead for the likes of Aphria Inc. (NYSE: APHA). As a whole, pot stocks have been sold off, no matter what time frame investors look at. It’s tough to call a bottom or pick any winners here. When will weed stocks find a valuation that fits?

The stock market saw its worst day since the 1987 crash last Thursday, with the Dow Jones industrial average, S&P 500 and Nasdaq each posting losses close to 10%. For a quick comparison, the go-to cannabis ETF, ETFMG Alternative Harvest ETF (NYSEARCA: MJ), dropped 12.5% on that day.

For an industry that has been crushed since it entered the market, investors have to wonder if the pain is almost over for the cannabis industry. Aphria stock may hold some answers.

Canada Cannabis Sales

In a late February note, Cowen analyst Vivien Azer wrote that Canada’s cannabis sales in 2020 would reach only $3.2 billion, roughly one-third lower than her original estimate of $4.6 billion. In this report, Cowen downgraded Aurora Cannabis Inc. (NYSE: ACB), as well as Tilray Inc. (NYSE: TLRY) and Sundial Growers Inc. (NASDAQ: SNDL).

While the downgrades were only pointed at a few of the licensed producers, the implications for the cannabis market in general are huge. Marijuana stocks already have suffered incredibly this year, and the recent market downturn has not helped one bit.

In the past month, or really since the market highs, cannabis stocks have fallen off a cliff. Aurora Cannabis traded down 54%, Aphria about 48%, Hexo Corp. (NYSE: HEXO) about 42%, Cronos Group Inc. (NASDAQ: CRON) nearly 34% and CannTrust Holdings Inc. (NYSE: CTST) was down 47%. Canopy Growth Corp. (NYSE: CGC) and Tilray are down 45% and 65%, respectively.

The question here is related to inventory. The path to profitability leads through cannabis fields (or in many of these companies’ cases, hydroponics). Positive EBITDA is only a possibility for Aphria, or any of the pot stocks, if the company can move more product.

Black market sales may be a hindrance to this, with competitive pricing, but it is clear that the demand is there. Not to mention, should the United States legalize marijuana on a federal level, a huge market would swing its doors wide open.

Cash Heavy

Aphria announced in late January that the company has accepted a strategic investment from an unnamed institutional investor of C$100 million (US$76.14 million) to acquire 14.04 million units. Each unit consists of one share of Aphria stock and one-half of one warrant to purchase one share of common stock at C$9.26 for a period of 24 months from the day the transaction closes.

Aphria stock closed trading at C$7.58 at the time of the announcement, implying a discount of about 6% of the purchase price for the units that include the warrants. The option price on the warrants works out to a premium of around 22% on just over 7 million shares (half the number of shares in the number of units in the transaction).

The company said it intends to use the proceeds from the sale to finance international expansion, for working capital and for general corporate purposes. At the end of its second fiscal quarter in November, Aphria reported cash and equivalents totaling C$498 million. Although Aphria stock has been on a bumpy road, the company’s war chest of C$600 million will help it withstand the ride.

Quarterly Fundamentals

Aphria reported its fiscal second-quarter results in January, and investors were not pleased. While this is another bump in the road, there are big changes underway in the company going forward.

The cannabis company posted a net loss of US$0.03 per share and US$92.2 million in revenue, which compared with consensus estimates of a net loss of US$0.03 per share and US$99.2 million.

At the same time, Aphria updated its guidance. The company now expects full-year revenue of C$575 million to C$625 million.

Chief Financial Officer Carl Merton commented on the updated guidance saying that it was “to primarily reflect certain market dynamics.” This included the rollout issue in Ontario, where more than 40 store openings are still pending. It also takes into account other factors, like a temporary ban on vape products in Alberta while it studies their impact, the higher costs of third-party supply due to the timing of a license, and a slowing of growth in Germany.