<p>Speculators may hardly complain about the shortage of buyers in the cannabis sector. Producers in the consumer and medical fields once in a lifetime had the opportunity to raise money, expand and increase revenues. Today, optimistic sentiment is absent from the market. Investors avoid sectors that did not report gains.
Aphria (NYSE: APHA) is not alone in losing almost half of its value in the last two months. The company rose to $ 6 per share on January 24 when the European Union awarded the company a certificate of good manufacturing practice.
So this makes it possible for the company to export internationally from its Aphria One facility. Despite further losses for the Aphria stock on acidifying sentiment, what are the core strengths the company offers investors?
Aphria sees itself as a leading consumer packaged goods and well-being. The company offers long-term growth – as long as the industry develops. As investors now know, none of the catalysts played to work in Africa’s favor. The transition from illegal to legal products remains a challenge.
Consumers would rather pay over 30% less for illegal cannabis than fight to find a legitimate store. Legislation in the United States to legalize marijuana is progressing, but slowly. Given that the United States – and the rest of the world – for example, are busy stopping the spread of coronavirus from China, cannabis legalization is likely to be delayed.
Strong position in Canada
Medical research for cannabis-based treatment is ongoing. For an impatient stock market, publishing favorable research reports does not lead to an increase in revenue. Still, it benefits the industry as a whole, as doctors and the general public will become aware of medical cannabis.
Aphrias priority when it comes to expanding market share in all of Canada is its immediate strategy. The company said it reported EBITDA-positive results over the past three quarters. On the supply side, it has state-of-the-art facilities. To promote demand growth, it has partnered with Shoppers Drug Mart, a national pharmacy chain in Canada, to distribute its goods.
On the marketing side, Aphria has a segmented approach in its consumer brand. Its brands focus on those who are common in the search for either relaxation or to participate in urban culture. Some of its other products focus more on the high-quality market dominated by serious enthusiasts and connoisseurs.
A skeptical investors may be wondering how much sales the high-end consumer group will provide for Aphria. The economy is likely to deteriorate sharply in the next two months because of the coronavirus. And if Canada starts reporting more cases, things could get even worse.
In addition, if its competitors such as Canopy Growth (NYSE: CGC) were to close down facilities, weak demand would almost certainly be ahead of the sector.
Long-term opportunities for benefits Aphria Stock
Aphria established a nationwide distribution model in Canada. It signed an agreement with Southern Glazer that provides 99.8% coverage of the Canadian population.
And Shoppers Drug Mart has over 1300 stores in the country. The network should help Aphrias revenues to grow steadily as it potentially runs out in stores across Canada.
Globally, Aphria is focused on the German medical market. The country has a population that is 2.3 times larger than Canada. And in Latin America, where the population is 18 times larger, the company sees an opportunity in the medical market.
In December 2019, Brazil approved the sale of medical cannabis. And in Argentina, Aphria collaborated with Hospital Garrahan. This could lead to adult sales and medical cannabis sales in the region.
Valuation and my takeaway at Aphria Stock
The Aphria share trades close to its fair value based on its 5-year discounted cash flow EBITDA exit model. These are the following assumptions:
Measured value Range Conclusion Discount rate 11.5% -12.5% 12% Terminal EBITDA Multiple 0.3x-1.3x 0.5x
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Aphria earns a high point on growth but lacks financial health (such as negative income and liabilities) and recent stock developments.
So if the company reports exceptionally strong sales growth, this could put pressure on the bear. And the bear currently has a strong grip, with a short float of 13.4% on the Aphria stock. The online time will show how the long-term potential of the sector will play out for Aphria.
Chris Lau is a contributing author to InvestorPlace.com and many other financial websites. Chris has over 20 years of investment experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace at Seeking Alpha. He shares his stock choices so that readers get original insights that help improve return on investment. At the time of writing, Chris had no position in any of the above securities.