Aurora Cannabis $ACB reported its latest earnings with improved revenues. And, that is about where the good news stops. But, Aurora is continuing with its restructure and focus on premium cannabis branding. There have been improvements in these metrics but there is still a long ways to go.
I had recommended $ACB as a buy back in December. The price was about $6.00 at the time. And, although the entire industry has seen increased buying based on a fundamental shift, I am not so sure that Aurora has what it takes to hold my buy signal at this price.
Cannabis stocks are selling off. I expect far more to go. There are too few positive fundamentals to have pushed these cannabis stocks as high as they went.
Cannabis Investing Fundamentals
The ‘Blue Wave’ is generally positive, but not nearly as much as you might think. If the US Federal government legalizes cannabis, anyone have any idea how a Canadian cannabis company readily benefits from that? Before you answer that question in any manner whatsoever, look at one additional variable: States that are legal are already legal and therefore any Federal legalization will have a muted effect in these states.
Now, ponder the question.
Cannabis investing is fundamentally changing with the landscape shifting in favor of legalization. But, this process takes time. And, just like what happened in 2018 with Canadian cannabis stocks, investors rushed in and bought up a lot of stocks in hopes of catching green gold. And, just as in 2019 and all through 2020, those cannabis stocks sold off.
I expect that cannabis stocks will continue to sell as the reality of fundamentals settles in. If you have had your eye on any stocks that you wanted to pick up for a song, this is your chance.
Aurora Cannabis Revenues
Here is a bright spot with Aurora Cannabis’s latest earnings release: Revenues climbed. If this is the general trend then the plan that management has in place is working, albeit slowly.
Cannabis is booming and this is the golden age of cannabis stock investing. Some of the charts for overall retail sales are impressive as they move upwards. For example, retail sales for cannabis in all of Canada:
In October 2019, retail sales in Canada were $120M. In October 2020, Canadian cannabis retail sales were $270M. that is about 130% increase in one year’s time. During that same time, Aurora Cannabis’s revenues declined. So, while the entire industry was expanding at a tremendous clip the bigger players, such as Canopy Growth $CGC, Tilray $TLRY, Cronos $CRON, and others fell flat.
The important thing to note is that in the beginning these bigger players focused on very large facilities and were going to grow large quantities of cannabis to sell on a wholesale basis. The margins on wholesale cannabis simply are not there to sustain such large facilities. All of these big players are back-pedaling as they reinvent themselves trying to compete with the smaller, boutique operations that are growing premium, high-quality product.
Given that, despite the revenue increase for Aurora, it falls short of the overall industry simply because they are lagging so far behind. That being said, they do acknowledge this shortfall and are working to build a premium brand.
Aurora Cannabis Gross Margins
Gross margins are a mathematical formula of cost-of-goods sold over total revenues. I am breaking down some 350 cannabis stocks and weeding through all of the best cannabis companies from the poorest. The best margins I have seen are coming in about 60% – 65%. This report falls far short of the best performers I found.
Going forward, if Aurora Cannabis can build a premium product line that commands higher margins then this metric has the ability to improve. Management’s stated goal is for more revenues to be generated from premium products.
Something I would like to point out, though, is that maybe this decline in gross margins is potentially a good thing. If management does in deed focus entirely on premium products while simultaneously continues to cut costs, then this may be the nadir of margins. From that, if the company continues to increase revenues, it is very possible that this one metric alone will add to the bottom line.
I am trying to look at this from a positive spin. Truth be told, why waste the time? I have a complete list of companies that are outperforming Aurora right now and so having to wait for Aurora to turn things around is loss of time.
Aurora Cannabis Operating Efficiencies
Last quarter, at 51.9%, that was higher than the best out there. Operating efficiencies at 95.1% then are definitely too high. But, they are better than Canopy Growth’s operating efficiencies (121%). Out of all of the cannabis companies that I am looking at, the best numbers I see are in the upper 20s to lower 30s on a percentage basis. Aurora must cut costs significantly.
This is a metric that is based upon total operating expenses over total revenues. If revenues continue to climb then, mathematically, this metric continues to move lower. In theory. Given that revenues increased as they did but operating efficiencies almost doubled, you can see how this is a non-linear mathematical equation.
The bottom line is that there are a lot of operating costs when compared to revenues and management will very likely address this moving forward. Again, I believe this is an opportunity.
Aurora Cannabis Net Revenues
Just as operating efficiencies moved in a negative manner, so did net earnings for Aurora Cannabis. This is their second-worst loss on record. Controlling costs is going to have to be their continued virtuous goal.
Aurora only has about $300M of cash on hand. So, another big quarterly loss like this will push them to the cash machine. My bet is this happens very soon. They will need operational capital and another disastrous number like this will force their hands.
Having to raise capital via a stock offer or private bought deal will dilute shares. Aurora will likely offer excellent terms to raise any new funds and that might be done with a warrant with a time offering a few years out. By doing that, the yardstick for current investors to see profits diminish simply because there will be more investors. And, those investors bought in at a discount.
Aurora Cannabis’s stated goal is a shift towards premium products with a higher gross margin. That is a necessity that needs to be accelerated. At the same time, increasing revenues simply to maintain a growth rate appreciable to the environment of cannabis companies, in general, will go worlds towards improving the long-term outlook of Aurora Cannabis.
Operational costs are simply too high relative to revenues. The best numbers I have seen are more near 30% than where Aurora is. Aurora should not be cutting costs. They should be slashing costs.
The cash situation is probably the worst aspect of this. Any capital raise will merely dilute current investors. And, unless there is a significant change in the company’s trajectory, a capital raise is likely to happen very soon.
But, after all of that, what about putting on a position in Aurora? If Aurora were to raise capital, and increase its premium revenues while cutting costs, there is no doubt in my mind that this would be a solid investment. But, why would you bother?
As I mentioned, I am working through some 350 companies. I have companies with market valuations that are 1,000th the size of Aurora Cannabis that are kicking Aurora’s butts. This may very well turn out to be an excellent turn-around story. But that will take time. You cannot get that time back. Why not invest in an opportunity right now that is going to make money right now?
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