So, I have a question: is Aphria (NYSE: APHA ) putting a $1 billion revenue target out there to push Aphria stock higher, or does it have the infrastructure and brands to deliver the goods?

Source: Shutterstock

Let’s take a look at both sides of the argument.

It’s a Realistic Target

Aphria interim CEO and chairman Irwin Simon believes the company can reach CAD$1 billion in sales by the end of 2020. To do that, it has to go from CAD$37 million in fiscal 2018, a big jump in sales for any company, especially one participating in one of the most competitive industries in the world.

Simon estimates that it will be a fifth of the way there by May of this year (May 31 fiscal year-end) with 40% margins. His rationale for its CAD$209-million estimate: Aphria’s Canadian operations are running at just 18% of capacity.

With its Leamington, Ontario, facilities bringing 562,000 pounds in annual production capacity online in the next year — up from 15,900 pounds today — the math suggests it’s possible.

“There’s so much low-hanging fruit right now in our Canadian business,” Simon said in an interview at Aphria’s temporary offices in downtown Toronto. “There are so many opportunities to get to profitability in our Canadian business.”

In its annual report, Aphria estimates its selling price between CAD$2.50 and CAD$10 per gram. Assuming a midpoint of CAD$6.25, if it sells its entire capacity, we’re looking at $1.6 billion annually based on 255 million grams sold.

So, it’s a mathematical possibility — which is good news for Aphria stock.

It’s Pure Fantasy

The problem with this kind of calculation is that it is a best-case scenario that factors in none of the competition.

According to New Cannabis Ventures, Canopy Growth (NYSE: CGC ) is leading the companies reporting in Canadian dollars with CAD$83 million in sales for its most recent quarter ended Dec. 31; Aphria’s in third place at CAD$21.7 million. Four additional companies are reporting in Canadian dollars with quarterly sales of CAD$10 million or more.

In terms of U.S. dollar companies, there are six generating higher quarterly sales than Aphria. Any of these businesses could steal Aphria’s thunder.

And there’s another problem with the $1-billion target. It assumes that Aphria’s production is going to go like clockwork, with no plants dying, achieving maximum efficiencies.

As we’ve seen by Canopy’s troubles with its B.C. greenhouses, it’s not easy going from growing vegetables to cannabis.

“The appeal of greenhouses is their low cost of production. But they are much more difficult to get right. I’ve seen greenhouses that used to grow chrysanthemum flowers and bell peppers having problems because cannabis is a much trickier crop,” explained PI Financial special situations analyst Jason Zandberg.

In case you haven’t noticed, Aphria has more than one million square feet of greenhouse growing facilities.

What are the odds that Aphria’s will not face any issues like Canopy’s? Slim to none, in my opinion. All the big players are having problems scaling up. If they weren’t, we wouldn’t have shortages.

If Aphria makes it to half its target by the end of 2020, I’d be shocked — and that’s bad news for Aphria stock.

The Bottom Line on Aphria Stock

If you compare Aphria to the other major players in Canada, Aphria stock is trading at a price-to-sales multiple of 48, less than either Canopy or Aurora Cannabis (NYSE: ACB ) at 83 and 72, respectively.

So, from that perspective, Aphria’s valuation is more reasonable than its two bigger competitors. More importantly, it’s based on what’s been produced and not pie-in-the-sky projections from CEOs like Irwin Simon.

Yes, Aphria is blowing smoke when it comes to its $1-billion target, but, then, so is everyone else.

For various reasons, I like Cronos Group (NASDAQ: CRON ), Hexo (NYSEAMERICAN: HEXO ) and Canopy.

That said, Aphria’s a reasonable bet if you believe that actual revenue is the only thing that counts when it comes to evaluating cannabis companies.

Just don’t bet the farm on Simon’s hope-and-a-prayer. You’ll be sorely disappointed.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.