Cannabis Corner: APHA Signals the Shakeout

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Watching Aphria Inc. (NYSE:APHA) recover from last week’s slight revenue miss, I can’t help but think that the moment we’ve anticipated is here. The shakeout is finally coming.

Winners and losers are emerging in the cannabis industry. Investors are choosing companies that already have achieved economies of scale. It no longer is about hypothetical potential and a rising green tide that lifts all boats.

If you have real sales and a route to profitability, you have a chance in the cannabis landscape of tomorrow. Otherwise, you’re rapidly becoming a dead money proposition.

APHA has real sales. As of the recent quarter, this company has successfully captured a $500 million slice of the global cannabis market.

That’s a healthy 15 percent share of legal Canadian sales, growing a lot faster than the overall opportunity. In other words, APHA is squeezing smaller companies out of the space.

And as it grows, the barriers to new entrants get higher. If you haven’t created a healthy sales base here yet, achieving it is going to be increasingly difficult and expensive.

Furthermore, there just aren’t a lot of $500 million slices for the winners to split. A hopeful like

Tilray Inc. (NASDAQ:TLRY), for example, is much less far along on its journey to real economies of scale.

TLRY is growing fast, but at best, I see it hitting $300 million in revenue this year. It is not even going to be profitable below $500 million, which might take another six months to reach.

At that point, APHA’s dominant position in the medicinal marijuana market will have locked in about $700 million of the overall market, leaving even less for everyone else.

Wall Street can see that. Only a few cannabis suppliers are going to get big enough to generate a payout for their shareholders. The others will suffer.

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