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Is Aphria’s Q1 Earnings Beat Story Overblown?

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In yesterday’s trading session, Aphria stock (APHA) closed at $5.07, up 4.32% from the previous session. This performance lagged behind the S&P 500’s 0.28% increase on the day.

The Dow Jones surged 0.17% while the Nasdaq gained 0.19%. Moreover, Aphria stock has risen more than 20% since the Aphria earnings announcement on October 15. This massive rise was driven by an EPS beat and the reiteration of the company’s guidance. However, there are some concerns. The company’s guidance seems very aggressive, given the oversupply of the cannabis market. Despite this concern, options market analysis and the technical chart show bullish market sentiment for Aphria stock. 

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Aphria earnings: Fiscal 2020 Q1 recap

Recently, we got the Q1 Aphria earnings release for the 2020 fiscal year. In Q1, total revenue rose 848.9% year-over-year to 126.11 million Canadian dollars, which includes $95 million from the CC Pharma and $30.8 million from Aphria’s cannabis sales.

The cannabis business significantly boosted its Q1 earnings while CC Pharma lost $4 million in sales. However, the company has also experienced higher production costs, which don’t allow Aphria to improve its gross margin. 

Moreover, the fiscal 2020 revenue guidance of $650 million–$700 million Canadian implies about $270 million in sales per quarter. These aggressive revenue numbers are expected to be achieved through sales of vapes and edibles, which the company plans to launch as early as December.

In my article about Aurora Cannabis, I discussed how the FDA is warning against vapes due to related illness and deaths. As a result, there’s a substantial risk that the vape launch could be delayed. 

How much volatility do options traders expect for APHA in the coming weeks?

The implied volatility for the options, at a $5.00 strike price that expires on November 1, stands at 68.75%. This number means investors are expecting an event to cause a moderate movement in one direction or the other. In comparison, the SPDR S&P 500 Trust ETF’s (SPY) implied volatility stands at 12.43% for the same expiration date.

Let’s take a closer look at the November 1 options. You can see a bid/ask for the $5.00 call option of $ 0.15/$ 0.25. Also, you’ll see a bid/ask for the $5.00 put option of $0.15/$ 0.30. Now, bear in mind the options strike closest to the APHA last closing price of $5.07. Having said that, let’s try to calculate the expected price move using the mid-prices of these options:

0.225 (5.00 Put) + 0.20 (5.00 Call) = 0.425/5.07 = 8.5%

The options imply, as you can see above, that APHA stock could rise or fall by ~8% by the November expirations from the $5.00 strike price. This estimation utilizes the long straddle strategy. Our calculation would put the stock in a trading range of $4.66–$5.47 by the expiration date.

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As well, the calls at the $5.00 strike price outweigh the put options about 4:1 with 735 open calls to 189 open puts. And the calls at the $6.00 strike price outweigh the put options about 18 to 1, with 976 open calls to just 54 open puts. A buyer of the $6 strike price calls would need the stock to rise to around $6.05 by the expiration date to break even. This imbalance suggests bullish market sentiment for APHA stock.

Technical analysis for APHA after Q1 Aphria earnings

Looking at the daily chart, you can see what’s going on with APHA. Currently, the stock is breaking out of the critical technical resistance level of $5.00. If Aphria stock can hold above $5.00 and start to rise, it wouldn’t surprise me to see the stock soar close to its next resistance level, around $6.00. Also, the chart shows that the money flow index value (35.05) is below its relative strength index (45.99). This difference suggests that the stock will rise in the near term after this month’s Aphria earnings.

Looking for more stocks that options traders are actively betting on? Take a look at Selling AMD Stock? The Rally Could Go On, Why Microsoft Stock Could Rise after Earnings, and Alibaba Options Traders Betting on a Bullish Jump.

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