weed squeeze

Are gains ahead for Aphria’s share price and the cannabis investment theme?

Aphria’s share price has fizzled out since mid-February. On 9 February, the Ontario-based cannabis producer’s stock hit a high of $32.29 as Reddit forums hyped weed stocks, with Tilray and Canopy Growth’s share prices sharply climbing on the same day.

This article was originally published on Opto – Invest in the Next Big Idea.

Perhaps unsurprisingly, the Reddit bubble has burst and Aphria’s share price has dropped over 20% since then, leaving it trading at CA$22.90 (as of 9 March’s close). 

Aphria’s share price movement is a reflection of the wider cannabis investment theme.

At the start of the year, cannabis topped our thematic ETF screener, but it has dropped dramatically since. Over the past month, the cannabis theme is down circa 31.38% and has dropped circa 10% over the last week (as of 9 March’s close).

Digging deeper into the individual ETFs, the Cannabis ETF [THCX] is down over 37%, the ETFMG Alternative Harvest ETF [MJ] is down 35% and the Amplify Seymour Cannabis [CNBS] is down 30%. All lag behind the S&P 500’s 0.88% decline in the same timeframe. THCX’s top holding GrowGeneration Corp [GRWG] has seen its share price slump circa 20% since 9 February, while MJ’s biggest holding GW Pharmaceuticals [GWPH] is trading flat.

However, there could still be plenty of upside left in the investment theme.  Joe Biden’s victory in November’s US presidential election has reignited hopes of Federal level approval for cannabis, while Aphria will merge with Tilray to create an even bigger operation.

Why has the cannabis investment theme dropped?

The most obvious answer is that the current share prices represent a correction following February’s frenzied trading. This makes sense considering that, over a 12-month period, Aphria’s share price is up 453%, Tilray’s 67% and Canopy Growth Corp’s 74% (as of 9 March’s close). All three are also trading above their January levels, so what we are seeing could be less a collapse in the stocks and more a correction.

Yet even at their current levels, these stocks aren’t cheap. Aphria trades at a 12-month trailing price to earnings multiple of 58X, while Tilray has a $4bn market cap and just $280m in forecasted revenue for 2021. While Tilray’s revenues are expected to increase to $369m in 2022, it begs the question whether the current share price is justified.

Eric Volkman, writing on The Motley Fool, notes that cannabis companies remain “speculative investments” which will suffer in a market downturn compared to more established longer-term holdings.   

“Weed has only been legalized/decriminalized on a piecemeal, state-by-state basis, and weed companies face many other challenges, including lack of access to basic financial services, price-dampening black market competition, etc. Even the most successful operators struggle to turn a profit and limit cash burn,” writes Volkman.

Despite the challenges, Volkman believes that cannabis stocks have a “promising future”, and cites the upcoming merger of Tilray and Aphria as having the potential to create a “powerful company”.

Where next?

The first half of 2021 is unlikely to be make or break for the industry, but there are some milestones that will influence whether cannabis stocks can continue to grow. Should Biden go further than decriminalising marijuana at a federal level, then the US market will open up for companies like Aphria and the stocks would see movement accordingly.

Even if federal legalisation does not happen, more states are looking to relax recreational marijuana laws individually, in order to raise taxes. New York is one of the states considering such a move, which would open a huge market for cannabis firms.

For now, it looks as though the cannabis investment theme could be a slow burn, but one with the potential to fire back up.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.

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