The fact is, if I wanted to invest in one of those types of companies, I wouldnt be taking a position in Aurora. To suggest Aurora should copy and follow the herd would make it much less of the company it is if were to give heed to that pressure.
While the financial media continues to pile on Aurora, recently driving its share price down, it maintains its adherence to its business model, which in my opinion has resulted in it being vastly undervalued when compared to its competition.
For example, when using the price-to-sales ratio as a metric, its approximate 67 is far below its chief competitor Canopy Growth, which has a hefty 133-plus. Another major competitor, Tilray, has a price-to-sales ratio of 77, even after plummeting from the dizzying heights of its 52-week by close to 85 percent.
The excitement surrounding Aleafia Health primarily involves its now-completed all-stock buyout of Emblem. Both companies operate medical clinics that can prescribe cannabis, as well as control their own marijuana supply chains. As a combined entity they control approximately 40 medical clinics, which have seen 60,000 patients, and expect to produce 138,000 kilos, when fully operational. This 138,000 kilos makes Aleafia Health a top-10 producer by peak output, despite the fact that its a relative unknown in the industry.
As mentioned above, pundits and some analysts point to the lack of a catalyst for the company, as if being the market leader in production capacity, international markets and increasingly in the medical cannabis segment, isnt enough to drive the share price up to where it deserves to be.
Easily the most referred to catalyst the company doesnt have is a major investment from a large company. It is usually reported as Aurora not being able to attract a suitor. That, in fact, is far from the truth.
On the other hand, its a largely unproven producer thats still trying to secure domestic and international supply agreements, as well as complete its capacity expansion projects. Its very inexpensive at a market cap of $312 million considering its capable of 138,000 kilos in maximum annual production, but Wall Street will need to see visible signs of execution from management if its to continue outperforming the most popular pot stock, Aurora Cannabis.
Management has stated it has been in numerous talks with potential large investors, but also said it isnt interested in making deals like Canopy Growth and others have, where they give up a significant portion of the company control to others.
According to the companys most recent investor presentation, it should be producing at an annual run rate of 625,000 kilos by the midpoint of next year. This assumes that Auroras three largest facilities — Aurora Sun, Aurora Nordic 2, and Exeter — are licensed and brought on line over the course of the next year. The assumption here being that Auroras premier output should lead to lucrative long-term supply deals domestically and abroad.
Its not that Aurora isnt able to attract investors, its that it has no interest in making a deal that it doesnt have to make when its rapidly approaching profitability.
Another criticism is it hasnt been aggressive in going after the American market, such as Canopy Growth has. Again, it has clearly answered that, saying there are a lot of issues with scale there, because of the differences in guidelines from state to state.
But for all that Aurora appears to bring to the table, healthy returns for investors have not been the result — at least since the beginning of 2018. Ever since the curtain closed on 2017, Aurora Cannabis share price has increased by a meager 9%. Meanwhile, the following three pot stocks have absolutely run laps around Aurora Cannabis, in terms of total return, over the same time frame.
While recreational pot is growing fast where its legal in the U.S., it still remains a low-margin market that has limitations and inconsistency on the sales side. Medical cannabis on the other hand, has almost unlimited growth potential around the world, and generates more revenue, earnings, and wider margins. This is the market Aurora has targeted, and it will show the market the value of that strategy over the next several quarters.
What the market is essentially saying is, Aurora Cannabis, outside of its period of rapid acquisitions, has settled down into a boring company that isnt generating big headlines any longer.
To me, this is a positive outcome because its allowing the company to absorb its various acquisitions while it ramps up production in anticipation of growing global demand for medical cannabis. At this time Aurora has a presence in 24 countries, far more than its nearest competitor.
I do believe there will be more headline events for Aurora, and that will give its share price a nice boost. That said, its not what investors should be looking for. Rather, they need to look at the different way the company does business, and its disciplined, efficient management, that is willing to sacrifice short-term value for long-term growth.
Aurora is getting close to having all the pieces it has built or acquired coming together, and that aligns with its production capacity soaring and demand for medical cannabis increasing at a solid pace around the world.
Itll continue to sell into the recreational pot market in Canada, and it may even increase its current 50/50 ratio of medical vs. recreational cannabis in the next couple of quarters, as problems in Canada area solved.
Even so, the strength of Aurora Cannabis is its medical cannabis strategy, and in that segment of the market, it has no peers. Its going to continue to extend its lead there over the next year or so, as all of its competitors are far behind it in the markets they compete in at the international level.
Its only a matter of time until Aurora permanently breaks out, and when it does, I think its going to catch a lot of the naysayers by surprise because of their focus on recreational pot at the expense of the much more lucrative and longer-lasting medical cannabis market.
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