The market is indeed very upbeat about marijuana legalization now that the Democrats have taken control of the Senate. The cannabis sector has gained immense momentum since then. Hopes of decriminalization of marijuana will lead to its wider adoption in more regions of the United States. With developments like this, the industry players are poised to gain significantly. Thus, investors are eager to add cannabis stocks to their portfolio.
However, not all cannabis companies have the strength to perform well in the long-run. Due to operational inefficiencies, prolonged periods of losses, and lack of product innovation, many pot producers have become risky propositions. Some of them are also suffering from a high cash burn rate.
Aphria Inc. (APHA), Organigram Holdings Inc. (OGI), and Cresco Labs Inc. (CRLBF) are three such companies with an uncertain future. APHA and OGI have demonstrated continuous losses and operational weakness. While CRLBF has better financials, it still has to prove its strength in the current phase of market volatility and maintain its cash position. Thus, investors should steer clear of these stocks at this juncture.
Aphria Inc (APHA)
APHA is involved in the cultivation, processing, production, as well as commercialization of medical cannabis in Canada and globally. The company also sells pharmaceutical-grade medical cannabis, adult-use cannabis, and cannabis-derived extracts under its brands Solei, RIFF, Good Supply, Aphria, and Broken Coast.
During the second quarter ended November 30, 2020, APHA’s revenue increased 33.1% year-over-year to C$160.5 million. Loss per share widened to C$0.42 from C$0.03 posted in the prior-year period.
In terms of revenue also, the growth was subdued in North America. APHA’s retail cannabis sale also trailed the marijuana sales growth in Canada during September and October. This is a warning sign which indicates that it is losing its foothold on the home front. It is now looking at Europe for diversification and relying heavily on German sales. Another cause of concern is the contraction of its gross margin to 27.3% from 29.7% posted in the previous quarter. As the company is merging with Tilray, it is even more critical for the combined entity to break even. APHA’s shrinking gross margin at this point won’t help.
Analysts expect revenue for the quarter ending February 28, 2021, to be $139.4 million, indicating a 27.1% year-over-year growth. Loss per share for the quarter is likely to be $0.02.
APHA also has a stretched valuation now. In terms of Price/Sales, it is currently trading at 10.13x which is much higher than the industry average of 9.04x.
APHA rallied 312.2% during the past year to close Friday’s trading session at $16.94. Over the past six months, the stock rallied 275.6%.
APHA’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F…