If you're looking for the fastest-growing industries on the planet, there's a good chance your research is going to lead you to the marijuana industry. Depending on which Wall Street estimate you prefer, the legal weed industry could grow to as large as $50 billion to $75 billion in about a decade's time. That's enormous growth from the estimated $12.2 billion in global sales in 2018, according to Arcview Market Research and BDS Analytics.
Given this strong sales growth, the assumption would be that all popular pot stocks are soaring. But this isn't the case. One of the most popular marijuana stocks, Ontario-based grower Aphria (NYSE:APHA), has lost a third of its value over the trailing six months.
Aphria: value or value trap?
On the surface, Aphria would appear to check a lot of the boxes that pot stock investors look for. The company is currently expected to slot in as Canada's third-largest grower, with 255,000 kilograms in peak annual yield. The company's organically constructed Aphria One campus, and its partnership with Double Diamond Farms that led to vegetable-growing greenhouse retrofits, are expected to generate 110,000 and 140,000 kilos, respectively, when fully operational. The remaining 5,000 kilos will come from Aphria's acquisition of Broken Coast Cannabis, completed last year.
In terms of output, few companies are as "inexpensive" as Aphria. Putting profitability aside for the moment, since legal weed is such a new industry, investors can purchase Aphria's 255,000 kilos of peak output for a market cap of $2.3 billion. By comparison, Canopy Growth is lugging around a $15 billion market cap for just over 500,000 kilos in peak annual production, while Cronos Group sports a $3.4 billion market cap for only 120,000 kilos of forecasted peak output.
As a company with top-tier production, the expectation is that Aphria would have no trouble securing lucrative long-term supply deals, as well as attracting brand-name partners in the food, beverage, tobacco, or pharmaceutical space. Also, with about 10% of the company's production devoted to alternative cannabis products, such as cannabis-infused beverages, brand-name food and beverage companies would seem to have added incentive to team up with Aphria.
No partner? No problem!
To date, though, Aphria is in the minority among the most popular pot stocks not to have a partner, and its interim CEO, Irwin Simon, is perfectly OK with that.
Last year, Canopy Growth closed on a $4 billion equity investment from Modelo and Corona beer maker Constellation Brands. Last month, Cronos Group closed on a $1.8 billion equity investment from tobacco company Altria. And in December, Tilray partnered with Anheuser-Busch InBev and Novartis' generic-drug subsidiary Sandoz. Among the popular pot stocks, only Aurora Cannabis (NYSE:ACB) and Aphria are currently without a brand-name partner.
For Aurora, the grower predicted to be at the head of the pack in terms of peak annual production, this is expected to change pretty soon. Less than three weeks ago, Aurora Cannabis hired billionaire activist investor Nelson Peltz, the founder of Trian Fund Management, to act as the company's strategic advisor. Peltz has a history of seeking change with companies involved in the food and beverage industries, so he looks to be the perfect middleman to help broker a brand-name partnership or investment for Aurora Cannabis.
But Aphria's Simon isn't convinced that his company needs a partner to thrive. Simon, who took over the CEO role from Vic Neufeld, who stepped down following a short-seller report, founded Hain Celestial Group (NASDAQ:HAIN), a successful manufacturer and distributor of organic and natural food products. Founded in 1993, Simon grew Hain Celestial into a company that generated $2.46 billion in sales in 2018, the year he stepped down as CEO. Hain found success by forging close-knit relationships with Whole Foods Market (now a subsidiary of Amazon.com) and Walmart, and Simon believes his intricate knowledge of the food and beverage industry should lend to success throughout North America. Said Simon in an interview with Bloomberg, "I have a great familiarity with the U.S., and I think we can do it on our own today."
No buyout is on the table, either
In addition to being confident about forging ahead on its own, Simon doesn't believe that the company's recent crisis of confidence is reason to be bought out.
For those who may not recall, Aphria was the target of a report from Quintessential Capital Management and forensic analysis firm Hindenburg Research in early December. The report alleged that Aphria had acquired three Latin American assets for an overinflated price from SOL Global Investment, and that there were conflicts of interest in the deal. An independent analysis that was released in mid-February found that the assets were purchased within a reasonable price range, but that three insiders did have conflicting interests in the transaction. This controversy looks to be what ultimately drove Neufeld to step down.
Following Aphria's plummet in December, Green Growth Brands (OTC:GGBXF) made an all-stock hostile takeover offer to acquire Aphria. The offer of 1.5714 shares of Green Growth Brands is currently worth about 7.23 Canadian dollars, which is a 41% discount to Aphria's current share price in Canada. Needless to say, Aphria's shareholders are extremely unlikely to be swayed by a deal that would reduce the current value of their shares by 41%, and Simon noted in his interview with Bloomberg that Green Growth Brands' offer isn't seriously being considered.
What's next for Aphria?
According to Simon, Aphria's next step will be to top CA$1 billion in revenue in fiscal 2020. Of course, doing so is going to require some help from Health Canada.
It's not that Aphria isn't ready to seize the day in the cannabis industry. Rather, the company is being held back, like many of its peers, by regulatory red tape. Through March 15, Health Canada had approved 159 cultivation, processing, distribution, and sales licenses. However, the agency overseeing the legal weed industry had almost 840 applications (mostly for cultivation) in backlog as of January 2019, according to Marijuana Business Daily. Aphria's current annual run rate of 35,000 kilos is well below its peak annual output of 255,000 kilos because the company's hands are tied as it waits for additional cultivation and sales licensing from Health Canada.
Another challenge is going to be reassuring investors that the company's corporate governance has improved. Having Simon at the helm is definitely a step in the right direction. But it may take a couple of quarterly reports and time to erase the bad memories associated with Quintessential's and Hindenburg's short-side report.
For the time being, Aphria is worth closely monitoring. But given its supply side and investor trust issues, that's about as far as I'd suggest investors go at this point.