Aurora Cannabis has already released preliminary FQ4 results so the actual key metrics arent the key focus here. For the June quarter, the company provided these preliminary numbers:
Aurora Cannabis has returned 21.7% YTD (year-to-date). This year, the company has delivered strong returns. Aurora Cannabis outperformed its peers and the broader equity market. Last month the company completed the acquisition of Hempco Food and Fiber. Management provided better-than-expected guidance for the fourth quarter. The company also sold its remaining stake in The Green Organic Dutchman Holdings for 86.5 million Canadian dollars earlier this month. All of these factors led to a rise in the companys stock price.
The biggest question is how close the company has come towards reaching adjusted EBITDA positive metrics. Maybe even more important is whether the metric is sustainable with industry production surging.
Aurora Cannabis stock drops after earnings miss
In order to reach adjusted EBITDA positive metrics, Aurora Cannabis needs to achieve gross margins of closer to 70% while Canopy Growth recently guided to goals for 40% gross margin targets.
The market will closely watch whether a premier Canadian cannabis company can hit a huge improvement over the 56% gross margins in FQ3 that led to an EBITDA loss of C$36.6 million. Any aggressive pricing from Canopy Growth could impact the targets of Aurora Cannabis.
At the same time, quarterly operating expenses in the C$70 million range need to be relatively stable over the quarter to achieve the EBITDA breakeven goals. The industry hasnt been great at restraining costs.
While the market will focus big time on EBITDA positive targets, a lot of questions will center around cannabis production, inventory and sales levels. The company had originally targeted having 25,000 kg available for sale in the quarter and the company updated guidance of closer to 30,000 kg. Production 20% above targets has huge ramifications for flooding the market with supply.
Aurora Cannabis started exporting full-spectrum cannabis extracts to Germany in the third quarter. At the beginning of the fourth quarter, the company expanded its internal oil extraction capacity to 7,000 kg per quarter. We expect all of these initiatives to drive the companys revenues in the fourth quarter.
The revenue target suggests sales of only slightly above 15,000 kg, up from 9,160 kg in the March quarter. The sales growth is impressive, but the end result is 50% of production still left in inventory.
Another key metric is the sales price per gram. In the prior quarter, the sales price dipped to C$6.40 per gram as more sales shifted to recreational cannabis sales away from medical sales. The price dipped about C$0.40 from the prior quarter and the targets suggest another similar dip to C$6.00 per gram.
Naturally, guidance will matter as much as the current financial metrics. Analysts are projecting revenues top C$120 million in the September quarter and up to C$140 million in the December quarter.
Where the company projects EBITDA in the face of ramping costs for Cannabis 2.0 and substantial capacity growth ahead could damage the stock. The market doesnt need ultimate profitability, but a clear path to maintaining positive EBTIDA with the quarterly revenue totals now topping C$100 million is a must.
ACB has a cautiously optimistic Moderate Buy consensus rating from the Street. This breaks down into 3 buy and 4 hold ratings in the last three months. We can also see from TipRanks that the average analyst price target is $9.08 – 43% upside from the current share price.
Prior to the August guidance, analysts polled by FactSet had estimated fourth-quarter revenue of C$111.9 million. In the August update, the company tamped down expectations, telling investors that it was now on track to book sales of C$100 million to C$107 million, net of excise taxes, but it failed to hit that mark in the end.
The key investor takeaway is that Aurora Cannabis is seen as a bellwether in the cannabis sector. How the company guides towards 2H numbers will move the sector for weeks to come.
The stock has a market valuation approaching $7 billion again as the stock has rallied above $6.25 again. The company has the difficult task of convincing investors the stock deserves to trade above 10x FY20 sales estimates of only slightly above $500 million in the face of surging industry inventory levels.
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