I've held a position in Aphria Inc. (OTCQB:APHQF) for a few months now. I strongly consider it to be one of today's best plays in the fledgling marijuana industry. The company has had quarter after quarter of positive earnings coupled with growing revenues. That's a hard resume to find in the cannabis sector. The company is Canadian (a country with a much "kinder" attitude toward marijuana); and works within the supply of the country's medical cannabis supply. The fact that Canada is currently involved in debate over legalization of marijuana across the country is just icing on the cake.
Recently the company announced news that further fuels my bullish sentiment for the stock. Aphria has inked a deal with HydRx Farms, Ltd. to wholesale more than 25,000 cannabis plants. The 12-month contract is valued at $5 million in revenue and deliveries will begin in the first quarter of 2018. Revenue is expected in the form of $1.2 million for each quarter of shipment. HydRX is part of a combined company with CannScience known as Scientus Pharm Inc. The biopharmaceutical company works in the development of medical cannabinoid research and products.
What does this mean for Aphria's financials?
Expect the $5 million to contribute greatly to Aphria's revenue growth rate next year. When you take into account the current scale of their business, this deal is a big step. In the first quarter of 2017 Aphria had $5.12 million in revenue. Based on the way things have been heading, I expect that figure to increase in subsequent quarters this year. Still, an additional $1.2 million per quarter next year represents a 23% increase in the Q1'18 versus Q1'17. Factor in trending revenue growth in other areas, and we're looking at a very nice sales increase.
Of course moves to expand into the American market through subsidiaries still offer another potential stream of new business; but I am still a bit pensive here due to a harsher view from our Federal system. The question (as with basically everything in our country) is how much state authority will be respected by federal lawmakers on the issue. Aphria is basically involved in the indirect ownership of one of Florida's 7 dispensaries; and I consider it a more insulated play than say going right for a recreational business in Colorado. Florida has an ever expanding senior population, and medical use of cannabis certainly has its place in the state. I'm still not sure how it will work out, but it does offer potential.
Of course the biggest fish is still the ever pending Canadian legalization of marijuana. As usual, nothing in government ever goes smoothly; but the collective discussions over tax rates/law enforcement/legal purchasing ages says to me that this is going to happen. If things do correspond with the supposed June 2018 deadline, the combination of revenue from Aphria's wholesale deal and some form of Canadian legalization could throw stocks like Aphria or Canopy Growth (OTCPK:TWMJF) into some seriously bullish momentum. As one of the largest medical suppliers in Canada, Aphria has some potential to have a serious edge on competition in the event of legalization.
I'm very excited to see Q2'17 results. This is a very big quarter for the company. If they can demonstrate that their large revenue increases are part of a bigger trend, I think this stock is one to have in the portfolio. I certainly have no intention of selling it.
Disclosure: I am/we are long APHQF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: APHQF is a member of the Seeking Alpha Corporate Visibility program. Learn more
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.