Over the last few months, Aphria (APHA) has generally disappeared from the headlines. Last year, the Canadian cannabis player faced a short seller attack leading to executive transitions and a failed takeover. The end result is a much more appealing valuation for the stock down over 60% off the yearly highs.
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Back in April, Aphria reported FQ3 results that included the period through the end of February. The period included a lot of the executive transitions such as interim CEO Irwin Simon and appointments of impressive board of director members in Walter Robb, former Whole Foods Market co-CEO, and David Hopkinson, Real Madrid Club executive.
In addition, Aphria recently hired a new Chief Operating Officer from The Hain Celestial Group and a Chief Information Officer and Chief Information Security Officer with other 30 years of experience including several positions in executive leadership. These executive transitions were part of President leaving the company on June 7.
The executive turmoil helps alleviate the fears of corruption made via the short sellers claims and leave the company in a major transition that can impact short-term results.
The company is scheduled to report FQ4 results for the period ending May on August 1. The prior quarter included impressive revenue growth, but the profit picture wasn’t improved.
Beaten Down Stock
The stock is now down to $6, a level reached during the short attack at the end of last year. The market cap has dipped to about $1.5 billion from original levels back in early 2018 that had Aphria as one of the most valuable cannabis stocks.
The May quarter revenues are forecast to reach $75 million or close to C$100 million for a solid bump from C$74 million in the prior quarter. The big focus will be operation efficiency. In FQ3, Aphria only generated C$13 million in adjusted gross profit and an adjusted EBITDA loss of C$14 million.
The revenue totals are highly focused on distribution revenues from the CC Pharma acquisition. The market will want to see the progress Aphria is making with the approved production of over 115,000 kgs of cannabis following a February quarter where the company only sold 2,637 kgs.
The value of the company will be derived by the potential to boost sales of their cannabis products with a mid-term production target set at 255,000 kg. The market is quickly looking past pure revenue growth figures in the cannabis sector knowing the market will become highly competitive in the future and ultimately margins and profits matter.
The key investor takeaway is that Aphria is heading out of the penalty box as the turbulent period of questionable management decisions has ended. The stock trades at the lows as the market still wants to see the new executive management team and board members effectively manage this evolving cannabis company in a more difficult cannabis market than expected.
The recommendation is to wait for the FQ4 report and review guidance for FY20 before making a decision on the stock. The company will exit the penalty box on a good story, but Aphria needs to solve the margin issues before the stock becomes a buy.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: No position.