If you're looking for marijuana stocks, Aphria Inc. (NASDAQOTH:APHQF) stands out as probably one of the best picks. The Canadian provider of medical marijuana is one of only a handful of marijuana stocks that can claim to be profitable (although a one-time gain from the sale of two investments made that profitability possible).
Aphria's market cap has increased significantly since the company's initial public offering in 2015. Can the stock go even higher? Perhaps, but here are three things investors need to know about this high-flying marijuana stock before buying.
1. What sets Aphria apart
Aphria stock is up more than 450% in less than three years. In just the last 18 months, shares have soared more than 360%. The core reason for Aphria's success is the same story as others such as Aurora Cannabis (NASDAQOTH:ACBFF) and Canopy Growth (NASDAQOTH:TWMJF). All three hold licenses to provide medical marijuana in Canada -- and that market is growing.
However, Aphria's market cap trails Canopy Growth by several hundred million dollars and it's also a little smaller than Aurora Cannabis. What sets the company -- and its stock -- apart from others?
Aphria CEO Vic Neufeld points to three areas where he thinks the company has competitive advantages. First, Aphria has a tangible and realistic path for growth, including a significant expansion of the company's Ontario greenhouse facility. Second, Aphria claims to have a superior quality management program. And third, the company maintains that its cost structure is much lower than that of major competitors.
2. Opportunities ahead
Like Aurora Cannabis and Canopy Growth, Aphria stands ready to benefit tremendously if Canadian Prime Minister Justin Trudeau's efforts to legalize recreational marijuana succeed. Professional services firm Deloitte forecasts the retail marijuana market could hit $8.7 billion annually if that happens.
Aphria expects to complete the fourth phase of its greenhouse expansion by July 2018 -- just in time to supply the recreational marijuana market under Trudeau's time table for legalization. The company's status as one of a limited number of medical marijuana licenses could give it an edge in gaining similar approval for providing recreational marijuana. With lower production costs, the company should be able to compete effectively.
Canada isn't Aphria's only target market, though. The company has a stake in Arizona medical marijuana provider Copperstate Farms. Aphria also recently finalized a deal to acquire Florida medical marijuana grower Chestnut Hill Tree Farm.
There's also a sizable opportunity in the German market. Germany legalized medical marijuana in March 2017. However, the country will import marijuana until it can establish state-run programs for marijuana cultivation inside the Germany. Neufeld stated earlier this year that Germany was "on [Aphria's] radar," but the company hasn't yet finalized deals like some of its competitors have to enter the German market.
3. Significant risks
Perhaps the biggest risk that could take the air out of the sails of Aphria stock is the possibility that efforts to legalize recreational marijuana in Canada will fail. Much of the company's current market cap hinges on the potential growth tied to this effort. Even if recreational marijuana is legalized in Canada, rivals such as Aurora Cannabis and Canopy Growth could take a greater market share.
The key risk for Aphria's expansion into the U.S. is that the Trump administration could target marijuana-related businesses in states that have legalized marijuana. While that wouldn't necessarily hurt Aphria's current financial performance much, it would cast a shadow over the company's growth prospects.
Another potential risk in the U.S. market (and perhaps other markets) is that larger companies jump into what they could see as an attractive space. Probably the biggest danger on this front is that big tobacco companies decide to bring their agricultural and marketing expertise to the marijuana industry.
Aphria has several competitive advantages and some great opportunities. However, investors looking to buy this marijuana stock must weigh the real risks the company faces against its potential opportunities.