Here's Why We Believe That Medical Marijuana Stock Aphria Is Undervalued

Stock SectorJune 13, 20185min7
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As Canada comes close to legalizing marijuana for personal use, Canadian pot stocks are on the rise. According to market research, the sales of Canadian marijuana are expected to go up by more than $4 billion in the first year of its legalization.   However, the cannabis industry is a tough one to be in due to endless regulatory approvals and laws required for the legalization of its use, just like the tobacco industry. However, with the upcoming legalization of marijuana for recreational use in Canada, the performance of the pot stocks in the country is anticipated to improve and is likely to replicate the growth trajectory of tobacco stocks, such as Philip Morris and Altria. Consequently, Aphria Inc., a low cost of producer of medicinal marijuana in Canada, has witnessed a surge of almost 23% in its price in the last one month. That said, the company’s stock has declined almost 40% since the beginning of the year, largely due to concerns over overvaluation. Hence, in this note we try to estimate Aphria’s fair valuation based on the industry P/S multiple using our interactive dashboard.

Aphria is an Ontario-based medical cannabis company trading on the Toronto Stock Exchange under the symbol “APH” and on the United States OTCQB Venture Market exchange under the symbol “APHQF.” The company produces dry cannabis as well as cannabis oil of varying qualities and strength. It has been producing and selling medical marijuana and its derivatives through its wholly-owned licensed subsidiary – Pure Natures Wellness – since 26th November 2014. The company caters to the retail customers through its online store and through telephone orders, while its wholesale shipments are sold to other licensed producers.

The company has a greenhouse facility in Leamington (greenhouse capital of Canada) that allows it to produce marijuana with ample amount of natural sunlight. Consequently, Aphria claims to be a scalable low cost producer of medical marijuana in the country. In fact, it is among the few cannabis companies in Canada that is profitable at the moment.

Despite showing a strong revenue growth in the last few quarters, Aphria’s P/S multiple is notably lower compared to its peers such as Canopy Growth and Aurora Cannabis. Given that the company is a low cost producer of medical marijuana and has been delivering solid returns, we believe that the stock is currently undervalued. Accordingly, we expect its P/S multiple to move closer to the industry average in the coming months.

Based on the P/S multiple of Aphria’s Canadian counterparts, we calculate an industry average P/S multiple of 56.49x. If we assume that the stock will move closer to this multiple, we arrive at a price estimate of CAD 13.50 per share for Aphria, which is roughly 12% higher than its current market price.

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