Aphria (NYSE:APHA) stock reported strong numbers for the first quarter of 2020 and triggered a strong near-term rally. However, Aphria stock is still lower by 54% from 2019 highs. I further believe that APHA stock is unlikely to provide investors will any major upside trigger. Even if the downside is limited from current levels, it would be optimistic to assume that APHA stock is positioned for a breakout rally. Therefore, investors should remain on the sidelines.
APHA reported stellar top-line growth for its first quarter of 2020 with revenue increasing to $126.1 million as compared to $13.3 million in 1Q19. However, distribution revenue for 1Q20 was $95.3 million. The growth from its core cannabis business was much lower than the headline numbers suggest.
For 1Q20, the company’s revenue from cannabis products was $35.1 million as compared to 4Q19 revenue of $33.5 million. While I am looking at a quarter-on-quarter (QOQ) growth, it should be robust for a business at an initial growth stage. For Aphria, revenue from medicinal cannabis declined marginally on a QOQ basis. At the same time, revenue from recreational cannabis witnessed 7.9% growth on a QOQ basis.
The key point being, the core business of medicinal and recreational cannabis has yet to gain traction.
No Bullish Triggers for Medicinal Cannabis and Aphria Stock
I believe that medicinal cannabis growth will be relatively muted in the next few years. The company’s 1Q20 management discussion and analysis outlines the reason: “Clinical research studies may lead to conclusions that dispute or conflict with the company’s understanding and belief regarding the medical benefits.”
The company further states: “Research in Canada, the United States and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids (such as CBD and THC) remains in relatively early stages.”
This point is verified by a survey about medical cannabis among primary care providers. According to the survey results, “clinical trial data about how medical cannabis improves patient quality of life domains is desperately needed.”
Clearly, the need for clinical-based evidence is gaining importance. And it will take a few years before evidence-based medicines are introduced. This “knowledge gap” is likely to keep physicians cautious on advising cannabis-related medicines. The impact will be on top-line growth for the industry.
APHA Has Ample Financial Headroom
Growth in the medicinal and recreational cannabis industry might be slower than