When it comes to the Canadian cannabis world, there are four big pot stocks that tend to hog the spotlight. That Big 4 includes Canopy Growth (NYSE:CGC), Aurora (NYSE:ACB), Tilray (NASDAQ:TLRY) and Cronos (NASDAQ:CRON). But those aren’t the only four pot stocks playing in the Canadian cannabis market. Indeed, there are a handful of other pot stocks which, for various reasons, aren’t followed as closely by Wall Street.
One such under-the-radar pot stock is Aphria (NYSE:APHA). For all intents and purposes, Aphria is just like Canopy, Aurora, Tilray and Cronos. The company is a Canadian cannabis producer which sells thousands of kilograms of cannabis into the legal Canadian market every quarter, and is looking to expand its reach into other countries, including the U.S. But, relative to the Big 4, Aphria Inc. (APHA - Get Rating) stock has a tiny market cap and is much, much cheaper on a fundamental basis.
No. Far from it. Instead, Aphria stock is understandably smaller and cheaper than its peers. This company has a relatively small cannabis business. That cannabis business has reported tumultuous and shaky results over the past several months. The optics and news flow surrounding the company have been confusing, at best, and very worrisome, at worst. There’s no big money investment. Nor is the balance sheet all that loaded up.
In other words, there really isn’t anything special about Aphria. Instead, there are few things which warrant concern.
As a result, while Aphria Inc. (APHA - Get Rating) stock is cheaper than its peers, it is cheaper for a reason — and that means investors are probably best served to wait on the sidelines until more clarity and stability are injected into this company’s narrative and fundamentals.
Cheapness Explained By Red Flags
On its face, Aphria stock is considerably cheaper than any of the Big 4 pot stocks.
Canopy is the biggest player in this market, selling over 10,000 kilograms of cannabis last quarter. Aurora slots in at number two, with just under 10,000 kilograms of cannabis sold last quarter. Meanwhile, Tilray sold about 3,000 kilograms of cannabis. Aphria sold around 2,600 kilograms of cannabis. And Cronos is the smallest in this group, with just over 1,000 kilograms of cannabis sold last quarter.
Given how much bigger they are, Canopy and Aurora reasonably have much larger market caps than Aphria. But, despite Aphria having a similarly sized cannabis business as Tilray and Cronos, Aphria Inc. (APHA - Get Rating) stock has a significantly lower market cap. TLRY stock has a $3.5 billion market cap. CRON stock is up above $5 billion. Aphria Inc. (APHA - Get Rating) stock is down near $1.5 billion.
Indeed, on a market cap per kilogram of cannabis sold last quarter basis, Aphria stock is much cheaper than its peers. The median valuation across the Big 4? Roughly $1.3 million in market cap per kilogram of cannabis sold last quarter. Aphria stock’s market cap per kilogram of cannabis sold last quarter? Below $650,000.
First, and foremost, Aphria’s cannabis business actually declined in terms of both quarter-over-quarter revenue and volume last quarter, due to supply shortages. Second, there have been some notable C-suite departures which have created confusing turnover at the head of the company. Third, there was a hostile takeover offer that didn’t pan out… and was very odd from the onset. Fourth, this company hasn’t attracted any big-money interest or offers, despite its cheap valuation.
No Need to Buy Aphria Stock Yet
Maybe the current cheapness in Aphria stock isn’t warranted in the long run. Maybe the cannabis business will stabilize, all the external noise will pass, and the stock will roar higher.
All this could happen. But, if it does happen, it will take several months to play out — meaning there’s no reason to buy in just yet while the story is still troubled.
The first thing that needs to happen here is the cannabis business needs to stabilize. Next quarter’s numbers need to represent growth from this quarter’s numbers. Until that happens, investors likely won’t buy in.
The second thing that needs to happen is all the optical noise needs to pass. The C-suite needs to see some stabilization. Attacks against the company’s credentials need to stop. The hangover from the hostile takeover bid needs to pass.
Bottom Line on Aphria Inc. (APHA - Get Rating) Stock
Pot stocks are inherently volatile, and Aphria Inc. (APHA - Get Rating) stock is volatile even for a pot stock. This volatility in the stock is the result of volatility in the company’s fundamentals and narrative. So long as this fundamental and narrative volatility persists, investors will remain hesitant to buy into APHA.
Aphria Inc. shares were unchanged in after-hours trading Monday. Year-to-date, Aphria Inc. (APHA - Get Rating) has gained 30.76%, versus a 16.13% rise in the benchmark S&P 500 index during the same period.
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