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Despite Aphria's Revenue Miss, Investors Should Remain Hopeful

By Prosper Junior Bakiny - Jan 22, 2020 at 3:30PM

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Aphria's second-quarter financial results weren't great, but here's why the company can look forward to the future.

Aphria (APHA) released its second-quarter earnings report on Jan. 14, and the company is one of the first to do so within the struggling cannabis industry. Unfortunately, the Ontario-based pot grower couldn't start the year with a bang. Aphria reported a net revenue figure of 120.6 million Canadian dollars, lower than the consensus analyst estimates, and a 4% sequential decrease. Furthermore, after recording a net income in its two previous quarters, Aphria's bottom line was negative this time around. The company reported a net loss of CA$7.9 million.

It's also worth noting that Aphria lowered its guidance for its current fiscal year. The company's original guidance was for net revenue between CA$650 million and CA$700 million, with adjusted earnings before taxes, expenses, depreciation, and amortization (EBITDA) between CA$88 million and CA$95 million. Aphria now projects that its revenue for the full fiscal year will be between CA$575 million and CA$625 million, with adjusted EBITDA between CA$35 million and CA$42 million. Naturally, investors weren't pleased with Aphria's revenue miss, and the red ink on the bottom line didn't help either. However, despite these unimpressive results, Aphria and its shareholders should remain hopeful.

Man holding his head in panic with graph with an arrow pointing down behind him

Image source: Getty Images.

Don't hit the panic button just yet

To understand why Aphria may see better days ahead, let's consider some of the reasons why the company decided to lower its guidance. In its press release announcing its second-quarter results, Aphria cited "a slower than expected retail location rollout in Ontario," and Alberta's decision to ban vape products temporarily due to health-related concerns as two of the reasons why it was lowering its guidance.

Both of these issues have been well documented. First, Health Canada has been incredibly slow at issuing retail licenses, and this has led to a shortage of retail cannabis stores, particularly in Ontario. Second, health concerns related to vape products arose last year as deadly respiratory illnesses associated with vaping started popping up, which led to the province of Alberta banning the sale of vape products while it studies their effects. 

However, Aphria expects both of these issues to be resolved in due time. The number of retail cannabis stores in Ontario should increase this year as the government implements critical changes in the process of applying for retail cannabis licenses. For instance, there will no longer be a cap on the number of retail cannabis stores allowed in the province, and the application system will no longer rely on a lottery. 

These changes should benefit Aphria and its peers immensely. The company also expects the ban on vape products in Alberta to be lifted. The only problem is that these developments will likely be happening after its current fiscal year ends.

Aphira's CFO Carl Merton said during the company's second-quarter earnings conference call: 

While there were a number of positive industry events in the quarter that speak to growth opportunities, those opportunities will only present themselves after the end of our fiscal year, including the change in the province of Ontario's retail rollout and the expected normalizing of store counts against Ontario's population.

By Aphria's estimates, vaping products should make up around 30% of the adult-use market in Canada by 2021. The company made this projection in July 2019. While it may need to be amended in light of more recent developments, the company remains hopeful that vaping products will be one of its growth drivers in the future. Aphria expects vaping products to make up the bulk of its portfolio of derivative products.

In short, Aphria's outlook for the current fiscal year may be a bit less exciting than it previously was. Still, the company is counting on several tailwinds to help its financial results improve in the future. 

But don't be too quick to pull the trigger 

Given the issues the cannabis industry encountered last year, many investors may choose to ignore cannabis stocks entirely. There will likely be a lot of volatility for pot stocks moving forward, and that alone may be reason enough to stay away -- that is, at least until cannabis companies can show that they can deliver consistently great financial results, which Aphria failed to do this time around. That's why, although I remain hopeful that Aphria will be one of the winners in the cannabis industry, I think it's best to stay on the sidelines for now while keeping a close eye on how the company develops. 

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