Canada's third-largest marijuana company, Aphria Inc. (NASDAQOTH: APHQF), announced this week that it has filed to list its shares on the New York Stock Exchange. Aphria's decision to up-list its shares from the over-the-counter market to the NYSE follows in the footsteps of Canopy Growth (CGC -1.01%), which listed on the NYSE in May, and Aurora Cannabis (ACB -2.79%), which is expected to begin trading on the NYSE on Oct. 23. Will this change be good for investors? Read on to learn why Aphria's decision matters.
The marijuana market opportunity
Marijuana has been illegal at the federal level in the U.S. since 1937, but it's been legal for medical use nationwide in Canada for years, and it's legal for recreational use nationwide in Canada beginning this month.
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Canada's medical marijuana market has been growing rapidly since regulators made changes that allowed Health Canada to license growers and retailers in 2014, but the medical market is much smaller than the adult-use market. According to Deloitte, Canada's medical marijuana sales will be 770 million Canadian dollars in 2019, but recreational sales could eclipse CA$4 billion.
Globally, the marijuana market opportunity is much, much bigger. An estimated $150 billion is spent on marijuana, including illicit sales, every year, according to the United Nations.
A logjam to demand for marijuana stocks
Individual states have increasingly been passing pro-pot legislation, and that momentum appears to be accelerating rather than decelerating. Nevertheless, marijuana is still illegal federally, and as a result, the U.S. marijuana market remains fragmented, with few investment-worthy options available. In fact, most U.S. marijuana stocks trade on the over-the-counter market, a lightly regulated exchange that's been home to fraudulent companies in the past.
The absence of stocks trading on the more regulated major U.S. market exchanges, including the NYSE, has kept many U.S. investors on the sidelines or forced them to consider buying marijuana stocks on the Canadian stock exchange. Unfortunately, trading on those exchanges can require special permissions from brokerage firms, and commissions on those trades can be more expensive than in America.
Institutional investors, including mutual funds, have been even more hamstrung from investing in the industry. These institutional funds must follow guidelines and investment mandates that often prohibit them from owning over-the-counter or foreign companies.
More liquidity equals more flexibility
Capturing the opportunity in Canada and elsewhere will require significant investments in marijuana production capacity, distribution, and retail. While Canadian companies have been able to secure financing for these projects so far, the opportunity to tap into a larger investment pool for funding is undeniably a big reason for Aphria's choosing to list on the NYSE, the largest stock market exchange in the world.
More than 2,400 companies list their shares on the NYSE, and combined, the market capitalization of those companies exceeds $23 trillion. That's seven times the market capitalization of all the stocks listed on the Toronto Stock Exchange (TSE), which is the primary exchange on which most Canadian companies currently trade.
There's no telling how much demand there will be from investors for Aphria's shares when they do start trading on the NYSE, but if Canopy Growth is any indication, then Aphria could be well received. Since listing on the NYSE in May, Canopy Growth's shares have more than doubled, and trading volume in Canopy Growth has soared. Daily trading volume in Canopy Growth's sales has averaged 9.3 million shares since May, compared to an average of 1.1 million between January and May, when Canopy Growth was only trading on the over-the-counter market.
If Aphria's listing on the NYSE goes off without a hitch, the potential to diversify ownership across more shareholders could provide it with even greater flexibility to expand existing greenhouses, such as its flagship, Aphria One; develop new products, such as edibles and beverages; and grow its business in other countries, such as Germany, where a fast-growing medical marijuana market exists.
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Separating itself from its cannabis competitors
Aphria hasn't been as aggressive in building its infrastructure through mergers or new facilities as Aurora Cannabis and Canopy Growth have been, but it's still in a position to be the third-biggest marijuana company in Canada.
The company is already knee deep in expanding its production to 255,000 kilograms per year from 35,000 kilograms per year. Because 250,000 kilograms of that capacity will be greenhouses that are cheaper to operate than indoor facilities, it could have a profit advantage over its competition.
Last quarter, Aphria's cash cost to produce 1 kilogram of dried flower increased to $1.30 from $0.95, but even with the headwind, its 64% gross margin was still nicely higher than Canopy Growth's 43% margin in its most recently reported quarter.
If Aphria can continue to keep its costs down and Canada's recreational market embraces value-added consumer goods products, like cannabis oils and, eventually, vapes and edibles, then Aphria could wind up rewarding investors in the future with best-in-class operating profits.
Is it a buy?
Every marijuana stock has rallied significantly ahead of Canada's recreational marketplace opening, and that has stretched valuations across the industry, including at Aphria. Nevertheless, Aphria is not nearly as expensive a stock as Aurora Cannabis or Canopy Growth. For instance, Aphria's price-to-sales ratio of 136 is high, but it's significantly lower than those of Aurora and Canopy Growth, whose ratios are 244 and 169, respectively.
No one will mistake Aphria for a value stock, but with a monstrous market opportunity ahead of it, I think a good argument can be made for including it in long-term growth portfolios, particularly if marijuana stocks take a breather now that the recreational market is up and running.
