Investing in marijuana stocks may seem like the newest way to make some green but buying cannabis stocks comes with risks.
It is a fair deduction. The legal market for marijuana is huge. Forbes says that if pot was legalized across the country, the drug would outsell ice cream, snack food, movie ticket sales, and streaming music services combined and times two. However, the issue is more complicated than that.
Pros and Cons of Investing in Marijuana Stocks
Right now, most marijuana companies are not seeing profit growth. Demand isn’t the issue – there is plenty of that – but it does mean that cannabis businesses are stretching themselves and taking on debt so that they can expand their operations.
Many of these firms are also experiencing operational hurdles. There are backlogs in licensing and distribution bottlenecks.
Demand causes other problems too.
The valuations on these companies are massive. Eventually, these companies will probably recoup their investments but some of them are going to miss the mark and fail in some way that could end up tanking their stock prices.
Before you choose a marijuana stock, make sure to do your research on the company and the markets in which they operate.
Is Aphria Stock a Buy?
Already, the company has a presence in 10 different countries spread over five continents and it is growing its production capabilities.
Roughly 90% of Aphria’s production comes from its flagship greenhouse.
At the end of FY 2018, the company produced around 30,000 kg of cannabis every year. However, it was working on expanding its greenhouse and ultimately having the capacity to produce 110,000 kg per year.
The total cost for this expansion was $147 million Canadian, or at least that’s what they budgeted.
The production upgrades also came with automation technologies to transplant cuttings, evaluate plant status, water plants, add nutrients, and transport plants throughout the facility.
Aphria [NYSE: APHA] also owns 51% of a subsidiary called Aphria Diamond with DD. Eventually, DD will sell Aphria the remaining 49%.
Aphria also applied some of its greenhouse upgrades to the subsidiary. When it comes online, the venture will give Aphria access to an additional 140,000 kg per year.
Once its facilities are fully-licensed, the company will be able to produce over 255,000 kg annually.
The costs for the upgrade did exceed the budget by roughly 7%, but the production value could make it easy for Aphria to amortize the additional cost.
Aphria’s flagship brand is Broken Coast. The name is a play on the colloquialism “BC Bud” and helps identify it as quality. It is considered a premium brand. Broken Coast is grown as a single strain in small batches.
The flowers are trimmed by hand and cured slowly. It is just one of the brands the company has. Aphria also the brands Solei Sungrown Cannabis, RIFF, and Good Supply, which it sells in a variety of formats.
Aphria [NYSE: APHA] has been on the NYSE since November 2018. The stock started well but it took a big hit after an earnings disappointment in April.
By August 2019, Aphria posted a profit for its FY 2019, which helped the company boost its share price, but its EBITDA was still in the red.
The company sold 13,400 kg for the year. There are many reasons for investors to be encouraged about Aphria, but nothing is guaranteed, especially in the short term.
Like any company, Aphria is bound to go through some growing pains and the uncertain legal climate around marijuana complicates matters. You might believe it is worth the risk; just go in with open eyes.
Should You Invest in Aurora Cannabis?
The company has been focused on acquiring the best researchers to help it grow. This has included purchasing Anandia Labs, CanniMed, and MedReleaf as well as 15 other strategic acquisitions over the past three years.
Aurora is also big on medical research. It has 40 clinical studies underway, impacting over 77,000 patients.
These efforts have paid off. In the consumer market, Aurora Cannabis [NYSE: ACB] grows 4 of the top 5 selling marijuana products in British Columbia and it won 17 Canadian Cannabis Awards. It also has strong market share in several European countries.
Aphria Stock vs Aurora Cannabis: The Bottom Line
All told, the current global cannabis industry is valued at $200 billion, so there is room for any company to grow. Plus, more and more countries are legalizing recreational cannabis.
However, marijuana is not legalized at a national level in the United States (and many other places), and that creates certain risks that you should understand before you invest in cannabis stocks.
If pot becomes legal in the US, the potential market swells. If it doesn’t, these companies may have to fight for market share in the countries where marijuana is legal. In the end, some of the investments these companies have made could be difficult to recoup.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.