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Comparing OrganiGram and Aphria’s Valuation Multiples

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So far this year, OrganiGram Holdings (NASDAQ:OGI) and Aphria (NYSE:APHA) have lost 11.0% and 36.7% of their stock price. During this period, OrganiGram has outperformed cannabis ETFs and the broader equality markets. YTD, the ETFMG Alternative Harvest ETF (NYSE:MJ) and the Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) have fallen by 33.4% and 31.4%, respectively. Meanwhile, the S&P 500 Index has fallen by 20%. Pricing pressure, thriving black market sales, and lower-than-expected demand for cannabis derivative products have dragged the sector down.

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OrganiGram reported impressive first-quarter earnings on January 14. During the quarter, the company beat analysts’ revenue expectations and reported a positive EBITDA. OrganiGram has already introduced some of its Cannabis 2.0 products in Canadian markets. Along with these factors, analysts’ recent upgrades reduced the weakness in the broader equity markets due to the COVID-19 outbreak.

Meanwhile, Aphria has underperformed cannabis ETFs and the broader equity market this year. In January, the company reported its second-quarter earnings. For the quarter, the company missed analysts’ revenue expectations and beat the EBITDA estimates. However, following the announcement of Aphria’s second-quarter earnings, the company withdrew its fiscal 2020 guidance. Withdrawing the fiscal 2020 guidance and weak second-quarter sales caused the stock to fall.

Now, we’ll compare OrganiGram and Aphria’s valuation multiples. Since the marijuana sector is still in the growth phase, the companies’ expanse will be on the higher side. So, we have considered the EV-to-sale multiple and EV-to-EBITDA multiple.

OrganiGram and Aphria’s EV-to-sales multiples

As of March 31, OrganiGram was trading at a forward EV-to-sales multiple of 2.42x—an increase from 2.18x at the beginning of this year. Analysts’ lower sales expectations for the next four quarters increased the company’s valuation multiple. However, the company’s lower stock price offset some of the declines. At the beginning of this year, analysts expected OrganiGram to report revenues of 229.0 million Canadian dollars. However, they lowered their sales expectation to 215.5 million Canadian dollars as of Tuesday. The decline in marijuana prices and lower-than-expected demand for cannabis-derived products prompted analysts to lower their estimates.

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Meanwhile, Aphria’s forward EV-to-sales multiple has declined from 2.17x at the beginning of this year to 1.66x. The decline in Aphria’s stock price dragged its valuation multiple down. However, the decline in analysts’ revenue expectations for the next four quarters offset some of the declines. At the beginning of this year, analysts expected the company to report revenues of 802.2 million Canadian dollars in the next four quarters. However, they lowered their expectations to 713.1 million Canadian dollars as of Tuesday. Aphria’s management withdrew its fiscal 2020 guidance. Industry-wide issues, like pricing pressure and weaker-than-expected demand for Cannabis 2.0 products, led analysts to lower their expectations.

Comparing EV-to-EBITDA multiple of OGI and APHA

Although OrganiGram stock has fallen since the beginning of this year, its forward EV-to-EBITDA multiple has increased. As of Tuesday, OrganiGram was trading at a forward EV-to-EBITDA multiple of 7.96x compared to 7.0x at the beginning of this year. Analysts’ lower EBITDA expectations led to a rise in OrganiGram’s valuation multiple. At the beginning of this year, analysts expected the company to report an EBITDA of 71.4 million Canadian dollars in the next four quarters. However, they lowered their expectations to 65.7 million Canadian dollars as of Tuesday. Pricing pressure and lower-than-expected demand for higher-margin derivative products might have prompted analysts to cut their expectations.

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At the beginning of this year, Aphria was trading at a forward EV-to-EBITDA multiple of 13.9x. However, the decline in Aphria’s stock price dragged its forward EV-to-EBITDA multiple to 12.4x as of Tuesday. Meanwhile, analysts’ lower EBITDA expectations offset some of the declines. At the beginning of 2020, analysts expected Aphria to report an EBITDA of $125 million in the next four quarters. However, they cut their EBITDA expectations to 95.5 million Canadian dollars as of Tuesday.

My take

I think that OrganiGram and Aphria are both well-positioned to capture the growing Cannabis 2.0 market. They have already reported a positive EBITDA, which not many cannabis companies have managed to achieve. At their current levels, OrganiGram and Aphria both look very attractive. I think that investors with a long-term perspective should consider buying the stocks on the dips.

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