Aphria (NYSE:APHA) listed its shares on the New York Stock Exchange in 2018. At long last, it began selling products in the Canadian recreational marijuana market, and the company expanded internationally. Aphria’s share price, however, still plunged more than 60% last year.
But 2019 is already off to a good start, with the stock making a comeback. The Canadian marijuana producer posted solid results in its fiscal year 2019 second-quarter update. Is Aphria now a buy…
Potential risks
The decision to buy any stock or not comes down to the risk-reward proposition. Let’s start by looking at the potential risks that Aphria faces.
Probably the biggest risk that’s been on investors’ minds lately relates to short-sellers’ allegations that Aphria significantly overpaid for the LATAM Holdings acquisition and profited key insiders in the process. Aphria’s board of directors established a special committee to review those allegations. This committee is made up of independent directors who joined the board after the LATAM transaction was completed. So far, however, the special committee hasn’t announced its findings.
The dark cloud hanging over Aphria related to the short-sellers’ allegations could also prevent the company from picking up a big partner. Several of its peers have already lined up deals with major companies outside of the cannabis industry. Failing to secure a big partner would put Aphria at a competitive disadvantage in the global marijuana market.
Aphria also continues to eat into its cash stockpile. It’s possible that the company could have to issue more shares to raise cash in the not-too-distant future. Investors face a real threat of dilution in the value of their existing shares resulting from another stock offering.
Another problem is that Aphria can’t sell products that it can’t make. The company hoped to receive approvals for its additional capacity at the Aphria One and Aphria Diamond facilities. However, Health Canada has a tremendous backlog. There’s no guarantee that Aphria will get a green light anytime soon. If not, the company won’t achieve the sales growth that it’s hoping to generate.
Even though Aphria stock is much lower than it was a year ago, it’s still not cheap. A tremendous level of anticipated growth is baked into Aphria’s share price. Anything that gets in the way of the company’s growth would make a huge negative impact on Aphria stock.
Potential rewards
While there certainly are several real risks for Aphria, the stock holds the potential to deliver…
Continue reading at THE MOTLEY FOOL
