In November, most of the world’s stock markets sold off on economic concerns and trade tensions between the United States and China. This affected a broad range of stocks including pot stocks. To add to the pressure of the selling, Aphria (APHA) was accused of insiders enriching themselves without full disclosure in a LATAM deal that was thought to be worthless. This disclosure was a final nail in the coffin for Aphria stock and it dropped precipitously on the news.
After a corporate review, the company felt the transactions were appropriate but that more disclosure could have been lent to the deal with the insiders involved. There was damage done to the stock and the reputation of the company.
More than one company has seen its share of scandalous news. But, these companies recover eventually. In the case of Aphria, the CEO, Vic Neufeld, has stepped down along with another executive. Since then, the stock has bounced back upwards
What is interesting about these revelations is how quickly that people in the know got on Reddit to disprove the portion of the deal that was labeled “worthless”. Both Quintessential Capital Management and Hindenburg Research claimed that Aphria paid some $211 million for assets that had no value. As it turned out, it was Hindenburg’s research that ended up having the lack of value. The sites that Hindenburg referenced as being empty shells were in fact not involved in Aphria’s acquisitions.
Individuals from around the world got on Reddit and showed multiple photos of the actual sites involved in the Aphria purchases. As a consequence, we as investors know more about Aphria than we did previously.
Aphria has significant capabilities when it comes to their cannabis production possibilities and will become one of the premiere producers of cannabis in Canada and the world. Whereas five years ago there was a bar-napkin concept to starting a cannabis company, now there is a full-fledged premier cannabis company that can produce a stellar 225,000 kg. of cannabis annually. That amount of production places Aphria in the top 5 producers in the world.
How Much Is Aphria Worth?
Trying to figure out what the potential of some of the cannabis companies could be worth may be simpler than imagined. I do a lot of research on cannabis companies and am an early investor in many of these companies. I intend on holding on to these companies for a long time and expect significant rewards over a long period of time. Aphria is a company that I like a great deal and own their stock.
At 225K kg. of cannabis annually, with an average of $5.20 price for wholesale cannabis, the company can expect revenues of ~$1.2 billion annually. With net margins at 17% and investors potentially bidding up the stock to 20-times earnings, the company could be valued at $4 billion. The current market capitalization of Aphria is $2.4 billion; they are undervalued based on their potential at some 60%. However, it is important to note that Aphria would have to sell 100% of their product in order to get 100% of that revenue potential.
As it turns out, the expectations are that not only did Canada run out of cannabis on its first day of legalized adult-use cannabis but that there will be continual supply pressures on the industry. Within two years the companies in Canada will have to double their production capabilities to keep up with demand. However, none of the major players are planning new facilities at this point beyond what is coming online over the next year. So, Aphria may very well get to the point where it does in fact sell 100% of its product simply based upon the current supply pressures.
I am investing in the bigger picture of cannabis. I summarily dismissed the outside report as being noise and a buying opportunity for Aphria. Had an investor bought on that news their stock price would have more than doubled by now. Moving forward, I expect that as more and more sales numbers show up out of Canada, investors will pick up on the potential of cannabis companies and, in particular, Aphria. I fully expect that the stock price will reflect the potential of this company. And, I expect that Aphria will grow to a far larger company in years to come.
Disclosure: The author has a Long position in APHA. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.