Since its inception in 2014 by Cole Cacciavillani and John Cervini, Aphria (TSE: APHA) has been seeing substantial growth YoY. Despite only being 6 years old, the company’s life has been eventful: from short seller accusations about its acquisitors in South America to takeover attempts by Green Growth Brands (OTCMKTS: GGBXF). More recently, it has also performed corporate acrobatics by delisting itself from NYSE with the purpose of getting listed in NASDAQ.
Year ending May 31,2020, the company registered substantial growth in revenue rising from $89,303 million to $204.736 million. Aphria also increased its expenditure on sales almost fivefold ($4.9 to $21.0 million) compared to the earlier period. Interestingly, marketing and promotion budget decreased despite growth in sales. As with most companies in the sector, the key challenges for Aphria are the legislative environment in the countries it operates and capital intense projects that take years to pay off. The competitiveness of the Canadian and the U.S. markets also pose risk of ever reducing margins.
Globally, the government attitudes towards cannabis and its products are changing. While some spearheading legislation changes necessary for medical applications, others loosening restrictions and decriminalizing recreational use of such products.
Despite growing global support, and increasing demand from consumers for legal, regulated, and safe channels to purchase cannabis and related products, the tendency is not met with margins necessary to recoup substantial initial investments. Albeit the sector seeing continuous and healthy growth, the competition also remains fierce and profit margins get diluted rather quickly.
It is not clear how Aphria, or any other company for that regard, will solve the problem of what seems to be a never-ending need for extra facilities to grow its products and decreasing product margins. In medium /long term, such disbalance may scare the investors from getting involved in larger, multiyear projects with limited profitability prospects.
One of the ways the company is trying to solve its profitability issues is through consolidation. Since it started, the company has acquired several smaller companies offering related products. On one hand, consolidation can be beneficial to the company, as production and distribution costs can be optimized. Increased size of the company helps to achieve greater market reach. However, on the other hand, innovation and entrepreneurship start to stifle and what it becomes increasing difficult to produce breakthrough ideas and concepts.
In overall, Aphria is in a much better position, compared to some of its competitors, such as Canopy Growth Corp(TSE: WEED), where financial acumen is virtually nonexistent. While some of its practices in Latin America remain questionable, the company’s financials show that it tries to keep control on unnecessary spend, including share-based compensation, which looks healthy in comparisons to its competitors.
Current and future investors should pay close attention on European markets, where legislation changes are ongoing and partnerships with the local operators are often a preferred method for market entry. Another important aspect is company’s ability to partner with large retailers that often have a streamlined distribution networks and necessary knowledge of capabilities of increasing sales of Aphria’s products.
Disclaimer: I have no positions in any of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. All information should be independently verified and should not be relied upon for purposes of transacting securities or other investments. See terms for more info.