Please ensure Javascript is enabled for purposes of website accessibility

Is Pot Stock Aphria Chronically Undervalued?

By Sean Williams - Mar 27, 2018 at 8:21AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Aphria's market cap is less than half that of Canopy Growth and Aurora Cannabis. Here's why that doesn't make much sense.

The legal marijuana industry is budding before our eyes, and investors are certainly seeing green. Over the trailing two-year period, a number of the largest pot stocks by market cap have catapulted higher by 1,000% or more, highlighting the optimism that surrounds the industry.

Oh Canada, my home and native land (of legal cannabis)

At the center of this bullishness is the expectation that Canada will become only the second country in the world behind Uruguay, and the first developed country overall, to legalize recreational cannabis by this summer. Legislation introduced in April 2017 has made its rounds in Canada's parliament and is set for a Senate vote on June 7, 2018. Should it pass, the Cannabis Act would be expected to become law shortly thereafter, paving the way for adult-use weed sales to commence by August or September 2018.

A rolled cannabis joint lying atop a cannabis leaf.

Image source: Getty Images.

At this point, legalization almost looks like a foregone conclusion. Progressive lawmakers outnumber conservatives in Canada's parliament, which should sweep most legalization concerns under the rug. Further, a relatively low excise tax rate has been established for legal pot, and the federal government has worked out a two-year tax-sharing agreement with all but one province. If legalized, Canada could generate $5 billion or more in added annual sales.

Canada's "Big Three" growers

In anticipation of passing the Cannabis Act, Canadian growers have been expanding their capacity as quickly as their balance sheets will allow. Canopy Growth Corp. (CGC -0.27%), the largest pot stock by market cap in the world, already has seven operating facilities spanning 665,000 square feet, and is in the process of constructing or developing greenhouses on 3.7 million more square feet in British Columbia. Though it hasn't been forthcoming on a full-year production target, 300,000 kilograms of dried cannabis a year seems very doable.

Not far behind Canopy Growth is Aurora Cannabis (ACB 1.63%) which, following its now completed acquisition of CanniMed Therapeutics, has lifted its fully funded annual production to 283,000 kilograms. The company's Aurora Sky project, which will be completed by mid-2018, is purportedly the most technologically advanced and automated grow farm in the world, and as such should have exceptionally low growing costs. 

Rounding out Canada's "Big Three" is Aphria (NASDAQOTH: APHQF), which should produce around 230,000 kilograms of dried cannabis a year. Around 100,000 kilograms will come from its organic four-phase expansion, while another 120,000 kilograms derives from its partnership with Double Diamond Farms. 

A surprised investor reading the financial section of a newspaper.

Image source: Getty Images.

Is Aphria chronically undervalued?

Yet, what's interesting about these three pot Goliaths is their variance in market cap. Whereas Canopy Growth and Aurora Cannabis sport $4.92 billion and $4.16 billion respective market caps, Aphria is valued at "just" $1.86 billion. Yet, as noted, Aphria's estimated annual production doesn't trail Aurora or Canopy by all that much. That begs the question: Why is Aphria being so chronically undervalued relative to its two larger peers? Let's take a look.

One of the more apparent issues appears to be project completion and production ramp-up. Aphria's more than $100 million, four-phase expansion isn't expected to be completed until January 2019. Meanwhile, Aurora Sky should be finished by mid-2018, giving Aurora and Canopy Growth an opportunity to use their cannabis stockpiles as a negotiating tool for long-term supply agreements. In other words, with Aphria being a few months behind its peers in terms of ramping up production, there may be some fear that it'll lose out on supply deals.

There may also be concerns that Aphria doesn't have the branding or distribution channels of a Canopy or Aurora Cannabis. Keep in mind that Canopy Growth received a roughly $190 million investment from Corona beer maker Constellation Brands late last year for a 9.9% stake in the company. On top of Canopy already having the most recognized weed brand in Canada (Tweed), it also has an extensive distribution network that involves retail outlets and, now, access to partnering with Constellation Brands. Aphria has a solid medical cannabis supply agreement with Shoppers Drug Mart, but lacks the caliber of partners that its peers have amassed. 

A bottle of dried cannabis tipped onto a small pile of cash.

Image source: Getty Images.

Wall Street may not be giving this pot stock enough credit

Then again, Wall Street and investors might not be giving Aphria enough credit. For starters, virtually no marijuana stock has placed more emphasis on remaining profitable than Aphria and its management team. Aphria and MedReleaf are the only two pot stocks to have turned a full-year profit in each of the past two years. It's possible Aphria's acquisition of Nuuvera (NASDAQOTH: NUUVF) for $670 million could threaten that profitability in 2018, but its focus on its shareholders and profits is unmatched relative to Canopy Growth and Aurora Cannabis.

Next, the company's acquisition of Nuuvera demonstrates the leap forward it's taking in its distribution channels. While it may lack the branding punch of its peers, Nuuvera's distribution channels will give Aphria access to 11 countries, including Canada, when the acquisition closes. What's more, Aphria last week became the exclusive medical cannabis supplier in Argentina. With a dozen countries under its belt, Aphria is setting itself up to be geographically diverse. 

Aphria's growth estimates may also prove conservative. The company has upped its annual production target at its four-phase project on numerous occasions. It also has acreage that could be used to further growing capacity, pushing its annual production north of 350,000 kilograms annually, in my best estimate, by 2020 or 2021.

By some accounts, Aphria might be undervalued relative to Canopy Growth and Aurora Cannabis. Of course, when factoring in share dilution from bought-deal offerings, and the euphoria that pushed cannabis stocks in the stratosphere, the valuations of all three could wind up heading lower. Only time will tell, but this investor overwhelmingly prefers Aphria as a potential investment among the big three Canadian weed producers.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Canopy Growth Stock Quote
Canopy Growth
$3.76 (-0.27%) $0.01
Aurora Cannabis Stock Quote
Aurora Cannabis
$1.55 (1.63%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.