Aphria has been really impressing investors recently, being the only profitable large-cap cannabis stock in Canada and things seem to be getting even better for Aphria.
Last Friday they announced that Health Canada had licensed Aphria’s Diamond facility for cultivation. Aphria mentioned that it’s Diamond facility, which is a joint venture with greenhouse operator Double Diamond Farms, will effectively double their production capacity when it’s fully functional. Their Diamond facility will bring an additional 1,300,000 square feet of production space and should cap out at around 140,000kg per year of dried cannabis production. Prior to the facility being approved Aphria entered into the partnership last year and said that they expected it to be fully functional and approved by 2019.
There are two very important things to consider when digesting this news and the first point is the fact that Aphria has been true to their shareholders, actually delivering results on time. This is something that carries a lot more significance in these challenging market conditions, where many companies are doing the opposite. If Aphria keeps delivering on earnings and execution of their long term strategy, they have the potential to completely move away from their cannabis peers into a category of their own.
Second, with double the production capacity, Aphria will be able to grow revenues in the future as they build on top of their already successful business targeting the German market through their CC Pharma acquisition. Two quarters in a row Aphria was able to bring in over 90 million in revenue from Germany. Many investors are eyeing this international opportunity as a positive for the company since it is diversifying its exposure away from the Canadian market. There is nothing wrong with the Canadian market but there will be a huge influx of supply hitting the market in the next few years and investors are seeking more diversified options in anticipation of this.
Production capacity alone is not what will make a specific cannabis company successful. Many of Aphria’s competitors like Canopy Growth and Aurora Cannabis have a much larger production capacity number, yet those companies are still not profitable and don’t expect to be profitable for at least another year or more. In the cannabis business, this goes to show that the biggest is not necessarily the best, but production capacity is essential.
What makes a cannabis company successful are many factors, and so far Aphria has done a great job to perfect that formula. Production, management, distribution, and diversification are all key components of a successful cannabis business. It seems that Aphria keeps tweaking that formula in order to maintain profitability.
Aphria’s recent success has shown investors in the industry that it doesn’t always take strategic partnerships, massive production capacity or the latest technological advances to create a profitable business. Sometimes management needs to focus on a common goal, streamline their business and execute on time which should deliver results. That’s exactly what Aphria has done so far.
With Aphria’s production capacity essentially doubling overnight it will be interesting to see how the company uses this cannabis to generate further revenues. If they can execute like they have so far, every quarter could get even better when it comes to revenue and that could really drive their share price much higher than it is today.
(Disclosure: The author owns shares of Aphria)
APHA shares were trading at $5.03 per share on Wednesday morning, down $0.11 (-2.14%). Year-to-date, APHA has declined -11.60%, versus a 24.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
