Canadian marijuana stock Aphria Inc. (NYSE: APHA) became the latest to list its shares on the New York Stock Exchange (NYSE) this week. The move to the NYSE from the over-the-counter market makes it easier for investors to own shares in this cannabis company, but there are a few things you should know about its business prospects before pressing the buy button.
Why make the change?
Uplisting to the NYSE from the over-the-counter market increases regulatory compliance efforts and adds expenses, but it also opens up ownership to a much broader pool of investors who were previously uncomfortable or prohibited from owning stocks that trade on the lightly regulated over-the-counter marketplace, or on foreign stock exchanges. Absent listing its shares on one of the major U.S. stock exchanges, many institutional money managers, including mutual funds, simply couldn't own Aphria in their portfolios because of mandates.
Attracting those institutional investors is important to Aphria because institutions tend to hold onto their shares longer than individual investors, who can be more easily spooked by short-term stumbles or forced to sell shares if tumbles result in margin calls in their margin accounts.
Additionally, because institutions manage so much money, they're important to supporting any follow-on stock offerings that may be necessary to finance Aphria's future investments in greenhouse production, distribution, and sales and marketing.
A race to the top
Marijuana is illegal in the U.S. on the federal level, but Canada's medical marijuana market has been thriving since its government made changes in 2014 that created a system for licensing producers and marijuana sellers, and its recreational market just opened nationwide last month.
The recreational market opening is important because it's expected to be much bigger than Canada's medical marijuana market. There's been widespread supply shortages of marijuana since the recreational market's grand opening on October 17, but Deloitte estimates that recreational sales will be between 1.8 billion to 4.3 billion Canadian dollars in 2019 once the kinks in the supply chain are ironed out.
If those estimates are correct, then Aphria's sales could increase substantially from their current quarterly pace of CA$13.3 million. To put the size of the recreational market opportunity in perspective, Statista reports that Canada's medical marijuana sales were CA$600 million last year. Therefore, recreational marijuana sales could at least triple industrywide revenue next year.
To win its share of this growth, Aphria is investing heavily to boost marijuana production at Aphria One, a greenhouse that serves as its primary source of the cannabis flower for cannabis oils and other products. Currently, Aphria's marijuana production capacity is about 35,000 kilograms per year, but its Aphria One expansion and a joint venture on a second greenhouse, Aphria Diamond, should increase its capacity to 255,000 kilograms per year.
Assuming Aphria delivers on its production target, it has a shot at being Canada's third-largest marijuana supplier. For comparison, M&A and expansion plans are expected to result in 570,000 or more kilograms of future capacity at Aurora Cannabis (NYSE:ACB) and over 500,000 kilograms of future capacity at Canopy Growth (NYSE:CGC).
Although it will only be the third-largest producer, it could wind up being first in terms of profitability. A tight lid on spending and its early embrace of low cost production practices, including automation, have allowed Aphria to consistently produce marijuana at costs that are lower than those incurred by Aurora Cannabis and Canopy Growth.
For example, Aphria's cash cost to produce 1 kilogram of dried flower was $1.30 last quarter, and for comparison, Aurora Cannabis' cash cost to produce 1 kilogram of dried flower was $1.70 last quarter. Canopy Growth doesn't break out its cash cost of production, but Aphria's gross margin of 64% is higher than Canopy Growth's 43% gross margin, so Aphria's production costs are likely lower than Canopy Growth's, too.
Is Aphria's stock a buy?
A lot of short-term investors bought shares in marijuana stocks ahead of Canada's recreational market opening last month, and following that opening, and reports of supply shortages, Aphria's share price has tumbled to about $12 from a peak of $15.35 on October 15th.
I suspect supply imbalances will continue for a while, but I wouldn't extrapolate Canada's shaky start too far into the future, because those imbalances should disappear as expansion efforts ramp up. If I'm right, then Aphria's shares will be volatile in the short term because of the market's growing pains, but investors will be rewarded with significant revenue growth over time.
Overall, the sell-off presents an interesting opportunity for investors to buy shares in Aphria; however, this company's still trading at over 100 times trailing-12-month sales, so aggressive investors who can withstand the risk of shares falling further are the only ones who ought to consider buying it.