Commodities and Gold

Cannabis Corner: APHA Signals the Shakeout

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.

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. The Financial Times describes Ms. Kramer as “A one-woman financial investment powerhouse” and The Economist distinguishes her as “one of the best-known investors in America”. Ms. Kramer is often quoted in publications such as the Wall Street Journal, New York Post, Bloomberg, and Reuters. She is a frequent guest commentator on CNBC, CBS, Fox News and Bloomberg, providing investment insight and economic analysis. Ms. Kramer was an analyst and investment banker at Morgan Stanley and Lehman Brothers. Ms. Kramer founded and ran a long-short hedge fund and has been chief investment officer overseeing debt and equity portfolios. Since 2010, Ms. Kramer’s financial publications have provided stock analysis and investment advice to her subscribers. Her products include GameChangers, Value Authority, High Octane Trader, Triple-Digit Trader, 2-Day Trader, IPO Edge and Inner Circle. Ms. Kramer, a Certified Fraud Examiner, has also testified as an expert in investment suitability, risk management, compliance, executive compensation, and corporate governance. Ms. Kramer received her MBA from the Wharton School at the University of Pennsylvania and her BA with honors from Wellesley College. Ms. Kramer has provided testimony regarding investment policy to the U.S. Senate and is a frequent speaker on the markets, portfolio management and securities fraud and compliance. Ms. Kramer is also the author of “Ahead of the Curve” (Simon & Schuster 2007) and “The Little Book of Big Profits from Small Stocks” (Wiley 2012).