Aphria’s Fourth-Quarter Results Show It Still Has a Lot to Prove

Is Aphria (TSX:APHA)(NASDAQ:APHA) the last great hope of cannabis stocks? And is its stock a buy after its fourth quarter earnings report?

| More on:

Any stock that sees single-day losses in the double digits is in trouble in the current market. Wednesday saw Aphria (TSX:APHA)(NASDAQ:APHA) down 18.7% despite some encouraging news in its fourth quarter. A decidedly mixed fourth quarter saw Aphria report a rise in revenue, but ultimately record a net loss of $98.8 million. While quarterly EBITDA growth is encouraging, Aphria clearly still has a lot to prove to investors going forward.

A standout stock in a saturated market

Aphria’s divisive fiscal Q4 comes at a time when mergers and acquisitions could be the next logical step for survival in the overcrowded cannabis space. In fact, consolidation might be the only sure route to long-term market dominance in a patchy legal marijuana market.

The legal weed retail environment never really took off post-legalization. Meanwhile, little headway has been made when it comes to taking on the black and grey markets.

All of this leaves little room for individual cannabis stocks to appreciate. Even Cannabis 2.0 was a muted affair. This is especially troublesome in a new and characteristically uneven industry. In fact, this space is so uneven that indexing doesn’t really work with Canadian pot stocks.

Instead, investors need to pick leading cannabis stocks that outperform their peers. This essentially counts out low-risk buyers and makes Canadian cannabis a stock-picker’s market.

But if the way forward in this country is for cannabis producers to team up, the logic in picking individual stocks for eventual market dominance falls apart. For instance, an investor in cash-rich Producer A might see their star company team up with unprofitable Producer B.

If the latter is a stock which the investor has been avoiding like the plague, then that careful investment thesis (based on profitability in this scenario) is ruined.

Looking beyond Aphria’s fourth quarter

Aphria and Aurora (TSX:ACB)(NYSE:ACB) reportedly walked away from merger talks recently. A mega-company with a third of the Canadian market share might have been an exciting prospect. Given an optimal retail environment, such a company might have been expected to rake in close to $1 billion in sales per year.

In addition, it would have had an international footprint that reached somewhere in the region of 25 countries.

But these two businesses are arguably not all that compatible. Aphria generates a lot of its own revenue from the medicinal marijuana market in Germany, for instance. While reliability and predictability from such sales go a long way to establishing shareholder trust, the pharma angle doesn’t have a huge markup. Couple this with Aurora’s major MedReleaf boo-boo and these two names don’t really mesh that well.

As a speculative play, a bargain basement Aphria investment might appeal to the long-term investor. However, a net loss and missed analyst estimates ultimately outweighed a fourth quarter rise in revenue this week, so far as its share price performance was concerned.

Against the backdrop of a disappointing retail environment and crushing market forces, even Aphria is unlikely to recover cannabis momentum single-handedly.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.

More on Cannabis Stocks

Cannabis business and marijuana industry concept as the shadow of a dollar sign on a group of leaves
Cannabis Stocks

Should You Buy Canopy Growth Stock or Green Thumb Stock Today?

Let's dive into two cannabis giants, and which one may be the better pick for long-term investors.

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Could Aurora Cannabis Stock Finally Recover by Year-End?

Down 99% from all-time highs, Aurora Cannabis stock is focused on improving profit margins and expanding sales of its medical…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Are Pot Stocks About to Surge Again? 

With pot stocks making big moves of late, many investors are now asking whether the cannabis sector is worth investing…

Read more »

Farmer smiles near cannabis crop
Cannabis Stocks

Can Pot Stocks Aurora Cannabis and Canopy Growth Bounce Back in Q4?

Down over 99% from all-time highs, Canadian pot stocks such as Aurora Cannabis and Canopy Growth remain high-risk bets.

Read more »

Worker tags plants at an industrial cannabis operation
Cannabis Stocks

Can Canopy Growth Stock Finally Recover in 2024?

Down 98% from all-time highs, Canopy Growth remains a high-risk investment in 2024 given its weak fundamentals.

Read more »

Tech Stocks

3 No-Brainer Stocks to Buy With $20 Right Now

These three stocks are easy buys for those who don't have all that much to spend, and want long-term growth…

Read more »

Pot stocks are a riskier investment
Cannabis Stocks

Slow Burn: Is Aurora Cannabis Finally a Good Buy in June?

One of the benefits of choosing from some of the most beaten-down market segments like cannabis is that even a…

Read more »

Caution, careful
Cannabis Stocks

I Wouldn’t Touch This TSX Stock With a 60-Foot Pole

I wouldn't touch Canopy Growth Corp (TSX:WEED) stock with a 60-foot pole.

Read more »