The listing does nothing fundamental for the company, but it does add liquidity to its shares. That is why the stock topped over $12 again ahead of the listing: investors priced in the benefits of stock liquidity.
By late-October, a wide-spread selloff, led by the technology sector, cut shares to half the price at below $6. Now wild speculation on Aurora’s fundamentals is driving the stock movements for the time being, sending ACB stock up near-30% over the past week.
At its current size and growth potential, Aurora could eventually pay a dividend to investors. This could be at least a year away and depends on the company generating cash flow growth from operations. In the fourth quarter, the company reported pro former revenue of over $33.1 million.
This sounds small compared to the over $6 billion market cap but it is a big number compared to the rest of the industry. Aurora owes the revenue size to facility additions. In just a year, it added a fully licensed facility, had two under construction and funded capacity of 180,000 kilograms of cannabis annually.
We can attribute Aurora Cannabis stocks drop last month to marijuana stocks in general taking a hit. With few exceptions (such as MariMed, which rose 19%), stock prices in the sector pulled back notably last month after running up big-time during the late summer in anticipation of Oct. 17, when marijuana became legal for adult recreational use in Canada.
Aurora also has country diversification: it has a presence in three countries. It has operations and sales in 18 countries in total. Europe is notable because this location will become the company’s biggest distributor of medical cannabis. As management mentioned in its conference call, Aurora has eight facilities licensed for production and five sales licenses. It expects to have 11 facilities and an annually funded capacity of 500,000 kg.
Aurora’s vertical and horizontal integration sets it apart from the competition. With this structure, it maximizes its presence in the industry and throughout the value chain. Astute investors should monitor Aurora’s R&D spend each quarter. If R&D spend increases steadily in the quarters ahead, the company will have a growing range of medicinal cannabis products launched to market.
Currently, Aurora has 40 highly educated staff on the R&D team who specialize in plant science, cannabinoid and terpene research.
Aurora Cannabis (NYSE: ACB) stock declined 29.2% in October, according to data from S&P Global Market Intelligence. But its already up 18.8% in November, thanks largely to a 9.2% jump on Wednesday.
Aurora will do well in Canada as a potential 250 stores open in Alberta in the first year (with a 37-shop maximum per operator). But the growth opportunity will be international markets. The addressable market of the global medical cannabis market is 10 million kilograms annually. Even though Canada legalized cannabis to kick-off the revenue stream for Aurora, more countries need to legalize it, too, for Aurora to grow at a faster pace.
For now, Aurora will have to address the Canadian market primarily. Ahead of weed legalization in Canada, it loaded up its inventory and biological assets to service this market. Despite the inventory increase, Aurora increased gross margin to 74% in the fourth quarter. The product mix shifted to higher margin cannabis oil products, giving gross margin a lift.
Aurora acquired companies and ramped up investment in infrastructure and talent hiring in the fourth quarter of 2018, but it is not stopping there. It set up a new debt facility to lower the overall cost of capital. This will give ACB more flexibility in investment opportunities. The risk is that if demand weakens or if costs grow far faster than sales, the company’s losses could grow.
Aurora gets little coverage from analysts, so that could be a good thing. Investors could hold the stock before the market bids the stock price higher. On Tipranks, no analyst covered the stock in the last three months:
The company is benefiting from a growth momentum that followed after the legalization of cannabis in Canada. Now it is up to management to grow sales and to take on more market share to prove its worth to investors.
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The marijuana industry has truly been something to marvel at this year. Although weve witnessed plenty of highlights, including Vermonts legalization of recreational cannabis entirely through the legislative process and the first cannabis-derived drug getting the thumbs-up from the U.S. Food and Drug Administration, its the legalization of recreational marijuana in Canada thats stolen the show.
Following years of promises from Prime Minister Justin Trudeau and months of debate in the Senate, Canada officially legalized adult-use weed via the Cannabis Act on Oct. 17, 2018. Now that Canada has become the first industrialized country in the world to do so, Wall Street is expecting its pot industry to eventually generate $5 billion or more in added annual sales atop what it was already bringing in via medical cannabis sales and exports to foreign countries. Its this major opportunity thats enticed marijuana growers to expand their production capacity as quickly as possible.
Perhaps no marijuana stock has taken this to heart more than Aurora Cannabis (NYSE:ACB). Aurora, which recently uplisted to the New York Stock Exchange from the over-the-counter exchange, began the calendar year with the expectation of growing just over 100,000 kilograms of cannabis at peak capacity. This was to include its state-of-the-art Aurora Sky facility, with its projections for around 100,000 kilograms, along with Aurora Vie and other smaller facilities adding icing on the cake, so to speak.
Then, beginning in January, Aurora Cannabis got very aggressive on the partnership, organic construction, and acquisition fronts, and it hasnt looked back since. Listed in no particular order, the company:
According to the companys most recent quarterly operating results, this combination of organic builds, partnerships, and acquisitions is expected to yield 570,000 kilograms of production when running on all cylinders. By comparison, Canopy Growth Corp. and Aphria are the next-closest competitors, with estimated annual output of around 500,000 kilograms and 255,000 kilograms, respectively. This means that Aurora Cannabis is currently in the drivers seat in terms of peak annual production.
Of course, the company isnt done just yet. On Sept. 10, it announced plans to acquire all outstanding shares of South Americas ICC Labs (NASDAQOTH:ICCLF) for 1.95 Canadian dollars, or CA$290 million. While far from the largest transaction in the cannabis space, itll possibly border on being the third deal for Aurora in the top 10 largest deals in the cannabis space by market cap in history. This past Tuesday, Nov. 6, ICCs shareholders voted in favor of the buyout, paving the way for closure of the deal.
What is Aurora Cannabis buying exactly? First off, it gives the company a uniquely large presence in a handful of key South American markets. ICC Labs currently has approximately 70% market share in Uruguay, the only other country in the world where recreational marijuana is legal. It also holds licenses in Colombia for medical cannabis production.
ICC Labs also brings product diversification to the table. Uruguay is the only country in the world at present that allows licensed producers like ICC to grow cannabidiol- (CBD-) rich hemp at large scale. CBD is the nonpsychoactive component of the cannabis plant best known for its perceived medical benefits. Cannabidiol is traditionally targeted at medical patients and, as such, usually boasts better pricing power and margins than dried cannabis flower.
Auroras acquisition of ICC Labs also introduces much needed infrastructure. ICC has been in the process of constructing a large-scale extraction facility for some time now thatll be able to process 150,000 kilograms of CBD feed per year when complete. Its expected to be fully operational by the end of this calendar year.
And, most importantly, ICC Labs brings a lot of added capacity. It already has 92,000 square feet of existing cultivation space, with two additional facilities under construction: a 124,000-square-foot greenhouse in Colombia and a 1 million-square-foot facility in Uruguay. Combined, thats 1.2 million square feet that could, conservatively, add 100,000 kilograms of extra production potential each year.
Altogether, by 2021, assuming its projects remain on track and the company is able to receive all necessary cultivation and sales permits, Aurora Cannabis may be nearing 700,000 kilograms of annual production. Taking into account the economies of scale that come into play with an operation this size, Aurora could be a dominant force within the cannabis space.
Of course, theres more to being a successful marijuana stock than simply outproducing your peers. Investors would be wise not to be overly enamored with Auroras peak production estimates for two particular reasons.
First, youll have to understand that Aurora is still a long way away from hitting its peak production target. During the companys fiscal fourth-quarter report, released on Sept. 24, it suggests that itll only be producing at an annual run rate of 100,000 kilograms by the end of calendar year 2018 and perhaps 150,000 kilograms a year by the end of fiscal 2019 (June 30, 2019). Thats a far cry from its peak potential.
In the meantime, this is a company thatll be spending a lot of money constructing greenhouse facilities, building up its brands, and laying its international infrastructure. In other words, its a recipe for exceptionally high near-term costs, which should translate into unwelcome losses, even with surging sales.
The second concern with Aurora — which has been a problem for some time with most pot stocks — is the companys ballooning outstanding share count. In order to fund its numerous acquisitions and construction projects, Aurora has almost exclusively turned to bought-deal offerings. A bought-deal offering involves the sale of common stock, convertible debentures, stock options, and/or warrants in order to raise capital. These offerings could very well push its outstanding share count to north of 1 billion shares from 16 million just over four years ago. This weighs on the value of existing shares of the stock, as well as makes it that much tougher for Aurora Cannabis to produce a meaningful per-share profit.
Make no mistake about it: Aurora Cannabis has intrigue. But its best left on the sidelines by investors until its bottom line matches already-lofty expectations.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.