<p>In a relatively short time, the legal cannabis sector has moved from one of the most promising markets to one of the most frustrating. Aphria (NYSE: APHA) has actually experienced several boom-bust cycles, and has recovered from a card seller’s accusation of being a “shell game”, only to give in to last year’s industry-wide bleeding. But when some positive emotions return, is now an ideal time to speculate in the Aphria stock?
From a long-term perspective, I want to say yes. Even though the sector has experienced worrying headwinds, we are still talking about a previously illegal market becoming a legal one: in my opinion, it must count for something.
Plus, one of the big dogs in the cannabis industry, Canopy Growth (NYSE: CGC), recently delivered surprisingly positive results. The news sent a positive ripple effect and also highlighted invalid names.
At that time, the Aphria share also agreed to the fun. Recently, however, equities have not inspired much confidence. At a broader level, however, APHA’s technical position looks weak. On an annual basis, the shares decrease by 20%.
If 2020 is to be a recovery year, the Aphria share is doing a bad job of communicating it.
The investor community is also not in a good mood when it comes to the cannabis market. To regain their trust, companies like Aphria must make significant progress. While APHA has delivered three consecutive quarters of positively adjusted EBITDA, like other cannabis companies, it is not exactly stable. With a high debt burden and a negative free cash flow, Aphria has limited opportunities to stay afloat.
Currently, the Aphria share is a patience study: will investors give it enough time for the underlying company to deliver the goods?
Aphria Stock can benefit from an education
From a play observer perspective, I can understand the negativity towards APHA. In the first place, the situation of the supply chain in Canada is completely dire. In addition, it does not seem to have a realistic path towards a favorable solution. After all, weeds are weeds: it is not rocket science to grow these things.
Potential buyers should, however, consider two counter-arguments. Firstly, the headwinds in the supply chain are not just a matter of oversupply. Rather, as I have pointed out several times before, the Canadian Government blundered in its licensing process. In general, the provinces with the most adult cannabis users have the fewest number of pharmacies.
Therefore, I do not see the still robust black market for cannabis in Canada as just a price dynamic. Rather, the black market is willing and able to deliver what the legal market cannot. The Canadian government can help address this dilemma but again, it takes some time.
Second, the basic act of growing weeds may not be a rigorous science. But creating a distinct cannabis-based therapy that addresses specific conditions is. And this is where Afria can restore trust and confidence.
Although the company has several brands for adult use, the management focuses mainly on its name brand medical brand. To be able to lead in this growing sub-segment, however, you can not just throw in some old weeds. Different variations of cannabis promote different effects.
Therefore, general education would be huge for Aphria. One of the ways in which cannabis companies excel is to incorporate or accentuate terpenes, or a plant’s aromatic essential oils.
For example, marijuana products that integrate linalool (a lavender-based terpene) promote anxiety. However, alpha-Pinene (found in rosemary) provides energy and promotes mental acuity. So no, weeds are not “just” weeds.
How long will investors stay?
I mention this because it is important to realize that marijuana companies are not necessarily glorified farmers. Like other industries, cannabis companies can adjust the ingredients in their products to facilitate desirable results. It is this tweaking that separates the big companies from the mediocre.
In addition, individual opinions in Canada indicate that there is still an education gap among potential consumers. Should the marijuana industry create a more effective marketing campaign, demand may increase.
While this is the exciting opportunity for the Aphria stock, it takes patience to play. As I mentioned above, there is a shortage of streets, if any.
Perhaps the best way I can sum up APHA is this: the broader basic story remains as compelling as ever. But betting that other investors will feel the same is the risky part.
Josh Enomoto, a former Sony Electronics Business Analyst, has helped broker large contracts with Fortune Global 500 companies. In recent years, he has delivered unique, critical insights for the investment markets, as well as for various other industries, including law, construction management and healthcare. At the time of writing, he had no position in any of the above-mentioned securities.