A couple of key figures for the quarter are the gross margin and the average net selling price. In FQ1, Aurora saw the gross margin dip to 54% and the selling price for dried cannabis fell 26% sequentially to C$6.23 per gram. Any weakness here is problematic for the stock.
Cannabis stocks join market downturn ahead of major earnings reports
The lack of organic growth would normally crush a pricy stock, but the stock market is likely to still latch onto high hopes for the global cannabis market.
If Aurora Stock Falls on Earnings, Buy the Dip
The question Aurora needs to answer for investors is what happens with the additional supply hitting the market this quarter. The large cannabis company has long projected reaching an annual production rate of 150,000 kg by the end of March.
Due to the time period for the cannabis supplies to reach the market, Aurora forecasts 25,000 kgs available for sale in the June quarter. The number is 3.5x the 6,999 kgs sold in the December quarter while demand is not growing due in large part to the illegal market.
Along with the forecast for the higher production and sales level, management promoted the concept of Aurora being EBITDA positive in the June quarter. With the quarter halfway over, the risk is that management has to walk back this target due to lackluster sales and prices.
Aurora raised their total projected capacity from 500K kg to 625K kg back in early April, which it expects to reach my mid calendar 2020. A big question remains the justification of increasing planned capacity by 25% without any sign that all of the existing cannabis capacity will be absorbed. Any failure to explain this corporate decision could weigh on the stock.
Some potential upside comes from Ontario opening up additional retail stores after having an initial restriction of retail stores and the consumables market opening up in October. The addition of vapes, edibles and beverages will open up new revenue streams currently restricted, but the company has a lengthy period to transition to these new products.
The key investor takeaway is that Aurora stock is in a precarious position where the company will have a difficult time maintaining previous lofty projections. With about 1.1 billion shares outstanding, the stock still has a market value of ~$9 billion despite the dip to multi-months lows at $8.
The risk is to the downside, if management confirms some of the worst fears regarding pricing, mounting losses and wild capacity expansion. The likely outcome is that Aurora stock still spins a bullish market thesis due to global expansion and the further opening up of the domestic Canadian cannabis market. The market likely gives the stock a pass on weak results.
Cannabis stocks were mostly lower Monday, amid a broad market tumble related to a trade fight between the U.S. and China.
Against that backdrop, it looks likely that Aurora will similarly report weaker than expected third quarter sales and volume numbers which comprise muted sequential growth. Investors won’t like that. This early in the game, growth should be ramping sequentially. If it’s not, investors will be disappointed, and selling will ensue.
The marijuana sector in both Canada and the U.S. was a sea of red ink, with the ETFMG Alternative Harvest ETF MJ, +2.37% down 5.5% in Monday afternoon trading. The Horizons Marijuana Life Sciences Index ETF HMMJ, +3.24% was off 4.4% and its sister fund, the US Marijuana Index ETF, dropped 2.8%. Since the beginning of May, all the major cannabis exchange-traded funds are down more than 7%.
The worlds second largest cannabis company by market value, Aurora Cannabis Inc. ACB, +4.49% ACB, +4.52% said Monday that Radient Technologies Inc. RDDTF, +3.41% delivered its first batch of cannabis derivatives. According to Aurora, Radients technology is expected to be able to process about 300,000 kilograms of cannabis biomass at a single location. Aurora stock fell 4.5% in Monday trading.
Elsewhere in Canada, CannTrust Holdings Inc. CTST, +6.11% TRST, +6.64% said that it had completed a letter of intent with Canadas second most populous province, Quebec, to deliver recreational cannabis. The company did not disclose the quantity it had agreed to supply. CannTrust was down 4% in Monday trading.
Canopy Growth Corp. CGC, +3.52% WEED, +3.52% fell 7.1%, Tilray Inc. TLRY, +4.88% was down 9.2%, Cronos Group Inc. CRON, +6.95% CRON, +6.20% fell nearly 8% and Aphria Inc. APHA, +2.81% APHA, +2.30% was down 7.1%.
Aurora’s third quarter numbers likely won’t be that great. But, they won’t be awful either. Instead, they will likely be a mixed bag with big but slowing growth rates.
This week is a significant one for cannabis sector earnings. Tilray and Aurora are both set to report earnings Tuesday after the closing bell, though Auroras conference call is expected Wednesday morning. CannTrust and Dutchman are also expected to report Tuesday.
Aleafia Health Inc. ALEAF, -2.32% reported first-quarter earnings Monday before the opening bell, logging losses of C$20.2 million — including a one time noncash payment related to its acquisition of Emblem Corp. — on revenue of C$1.5 million. Aleafia stock fell 5.3%.
Green Organic Dutchman Holdings Ltd. TGOD, -0.52% , TGODF, -0.07% which has not yet sold any recreational cannabis in Canada, signed a distribution agreement for one of its cannabidiol, or CBD, brands for the German pharmacy market. Dutchman stock was down 4.6%.
In the U.S., Acreage Holdings Inc. ACRGF, +1.48% said Monday that it was selling its real-estate assets to a real-estate investment trust that had been recently formed. Canopy Growth last month purchased the right to acquire Acreage upon federal cannabis legalization in the U.S. The investment trust called GreenAcreage Real Estate Corp. will buy the assets and lease them back to Acreage under the deal. The investment trust will be run by GreenAcreage Management, in which Acreage holds a 20% stake.
Cowen analyst Vivien Azer initiated research coverage of Greenlane Holdings Inc. GNLN, +5.02% , which recently went public on the Nasdaq. Azer rates the company the equivalent of a buy and has a $21 target price. Greenlane went public at $17 a share but closed Friday at $16.25 and was down 5.3% in Monday trading.
In the note to clients Monday, Azer wrote that the current share price represents an attractive entry point given the companys prospects for robust revenue growth and profitability.
Max A. Cherney is a MarketWatch reporter based in San Francisco. Follow him on Twitter @chernandburn.