<p>Cannabis investors hope that 2020 will provide more clarity in marijuana stocks. After rising to record highs in 2018, stock prices for cannabis fell in a puff of smoke. One of the main problems for cannabis stocks was lack of profitability. Investors saw that making marijuana legal was only part of the battle. Canadian regulators have been slow to approve retail licenses and have created an imbalance between supply and demand.
That being said, the Aphria (NYSE: APHA) stock has stood out for good reasons. Aphria has shown profit where other cannabis stocks have failed. In 2019, APHA’s share price fell “only” by 17%. In this context, Horizon’s Marijuana Life Sciences ETF (OTCMKTS: HMLSF) fell by 39% for the year.
The question that many investors have is whether Aphria can generate actual sales that help justify the company’s 2020 price target.
The balance sheets suspect these positive income
Aphria has made a profit in the last two quarters. A closer look at the company’s balance sheet shows, however, that the result was due to an increase in non-variable income. The problem with non-operating income is that it can be an uneven beast. And without the non-operating income, Aphria would not be profitable.
Another problem for Aphria is how they estimate the value of their crops on a quarterly basis. In addition, APHA must estimate the estimated cost of selling these goods. The result is a positive adjustment in fair value that does not reflect how good (or in this case bad) the actual development of the company’s operations was. Mark Hake took a much closer look at Afria’s balance sheet and came to a bearish conclusion.
To be fair, this is not an issue that is unique to Afria. The International Financial Reporting Standards for Canadian equities set the standard. The catch, however, is that Aphria would not be profitable on an operational basis if these costs were removed.
Will APHA fall victim to its own forecasts?
The other problem for APHA is that they have predicted strong revenues. In its most recent revenue call, Aphria said it expected net sales for the financial year 2020 of between CAD 650 million and CAD 750 million. The quarter ended was Afria’s first quarter for the 2020 financial year. With net sales of approximately CAD 126 million, the company was less than 20% against the lower part of the forecast.
So what are analysts analyzing for the current quarter? The good news is that the consensus estimate is for revenue of CAD 130 million. The bad news is that the number is far from the CAD 200 million that Aphria needs to place them about halfway in the lower part of its forecast.
Aphria does not need more bad headlines
Aphria drew investors’ trouble over allegations of inaccuracies in acquiring Latin American assets. As I wrote back in October, an independent committee (formed by Africa’s board) found many of the allegations to be incorrect. But the resulting conflicts of interest led to the resignation of former CEO Vic Neufeld.
If this was the company’s first crime, it would be harmful. But since it is a second crime, the company is slipping on thin ice. Aphria will find it difficult to meet the revenue expectations it has set.
What should investors do with Aphria Stock?
When I see a stock with the potential for a series of results, I have to call it a holding. And that’s what I see with Afria. The cannabis industry should have a better 2020 simply because most of the foam has been wiped out of the stocks. But when investors start looking at these stocks based on their merits, what will they see?
In the case of Aphria, they have bought some time due to completely legal but unsustainable accounting measures. The company has not yet shown its competitors’ cash loss. But it has already taken a write-down of CAD 50 million on the previously mentioned Latin American transactions. And that confirms the suspicion that Aphria overpaid for these assets. This means that more write-downs and dilution are likely.
Overall, 2020 is the year that many cannabis companies must begin to prove their downfall to investors. Until they do, investors can press the pause button on Aphria.
At the time of writing, Chris Markoch had no position in any of the above securities.