4 Signs of Life in Aurora Cannabis Latest Earnings Report – The Motley Fool

4 Signs of Life in Aurora Cannabis\ Latest Earnings Report - The Motley Fool
Heres Why Aurora Cannabis Stock Stumbled
Since Canada began allowing recreational marijuana sales last October, Aurora Cannabis (NYSE:ACB) stock has fallen around 44% thanks to underwhelming sales and heavy operating losses. Recently released revenue results for the period ended June 30, 2019, disappointed analysts that were expecting more, but investors shouldnt give hope just yet. 

Despite missing some lofty revenue expectations, there were signs of positive cash flows ahead. These are the top four that investors should know about.

In other news, I sat down with Bradley Tusk, the CEO of Tusk Ventures and author of “The Fixer” in his Manhattan offices on Wednesday to tape an episode of The Firewall podcast. We had a wide-ranging discussion that went from cannabis tech startups to psychedelic drugs, and Mexicos incipient cannabis legalization — all in a snackable 20 minutes. The episode will drop on Wednesday, and you can listen to it wherever you get your podcasts.

Aurora Cannabis is still losing money, but it took a significant step in the right direction during the companys fiscal fourth quarter, which ended on June 30, 2019. If revenues and expenses recorded during the last three months of fiscal 2019 stays glued in place for all of fiscal 2020, shareholders wont have a lot to complain about.

Second, Battley reiterated that Aurora is actively looking at US CBD acquisitions, which we have reported on in the past. He also said that Aurora is looking closely at the landmark Canopy Growth-Acreage deal, and may consider pursuing a similar acquisition under that framework. We previously reported that the deals unique (if vague) structure would provide a pathway for other Canadian cannabis companies to do the same. 

Data source: Aurora Cannabis. Q4 = fourth quarter; FV Adj. = fair value adjustments; SG&A = sales, general and administration. 

On the policy front, House Majority Leader Steny Hoyer told the Democratic caucus that a bill to protect banks that serve cannabis companies will get a full House floor vote by the end of the month. The news follows Senate Banking Committee Chairman Mike Crapos statement to Politico that his committee will hold a vote on similar legislation.

During the past year, Auroras operating expenses exceeded the gross profit available to meet those expenses by CA$339 million, which just isnt sustainable. Simply repeating results of the latest three month period without any growth in fiscal 2020 would lead to a CA$49 million operating loss, which is a lot easier to swallow than previous losses.

I spoke with Aurora Chief Corporate Officer Cam Battley yesterday by phone. He said a few interesting things. One, he felt like the market has a “follow-the-leader” approach where, after companies like Canopy Growth and Cronos Group did deals with large alcohol and tobacco companies, investors expected Aurora to do the same.

It looks like a lot more topline revenue will end up hitting the bottom line in the quarters ahead. The cash cost to produce a gram of cannabis fell to just CA$1.14 from CA$1.42 during the previous three-month period.

As the managing partners of Poseidon Asset Management, a cannabis-focused investment firm, the pair have seen — and sat through — tons of pitches of varying quality. The two shared their best pieces of advice for startup founders looking to make a successful pitch in a recent webinar moderated by Business Insider.

New contributions from two of Auroras gigantic automated production facilities came into the picture earlier this year and the difference is enormous. The two facilities raised the companys overall production capacity ninefold to 150,000 kilograms annually.  

Auroras average selling price fell by CA$1.08 per gram to CA$5.32 per gram in the fiscal fourth quarter, but thats largely because of a huge uptick in wholesale bulk cannabis sales from CA$2.1 million in the first three months of 2019 to CA$20.1 million during the quarter ended June 30, 2019.

Aurora recorded an average selling price of CA$3.61 for bulk cannabis, $5.14 for consumer cannabis, and CA$8.51 for medical cannabis. Despite the wide pricing range, the gross margin reported for bulk sales, 61% was actually better than the margins on consumer and medical sales.

Consumer marijuana sales rose 52% from the previous quarter to $44.9 million, but it was dried flower sales that did most of the lifting. As a result, the average net selling price of products in the consumer segment fell by $0.34 compared to the previous quarter. 

He had a great quote around the regulatory complexity of cannabis and the challenges of putting together deals. “Its both legal and highly regulated at the state level, and highly illegal at the federal level,” Hauser told me. “Its like a quantum physics problem.”

Products extracted from marijuana flower are generally much more expensive than the flower itself, but theyre also a lot more expensive to produce. Thats why the gross margin on consumer cannabis revenue rose to 55% from 50% in the previous quarter despite a falling average sale price.

K-Zen co-CEO Judy Yee told Business Insider that the startup tailored its fundraising approach to investors who would be willing to invest in cannabis, as most mainstream venture funds are still reticent about the space.

Aurora Cannabis and plenty of other marijuana stocks have tumbled recently, but now isnt the right time to start a long position. The company might be able to produce an operating profit in the quarters ahead, but that profit wont be large enough to support a $6 billion market cap in the foreseeable future.

She put a harsh price target on MedMen — $1.50. While she said the brand has strong equity in the lucrative California market, the companys constant need for cash and rampant spending will hurt it in the longterm. 

During the six months between last December and this June, Statistics Canada recorded dried flower sales that rose 37% to an annualized 119,700 kilograms, and cannabis oil sales that rose 23% to an annualized 115,400 liters.

Heres a list of the cannabis companies that are hiring the most this year, from the job recruiting site Indeed. As a reminder, we published a recruiters guide to landing a job in the cannabis industry last week:

Remember, Auroras already capable of producing 150,000 kg of dry flower per year, and its not the only Canadian producer that can supply more flower than the entire country seems willing to buy. There are literally dozens of licensed producers fighting over a domestic market that simply isnt large enough to support Auroras valuation. 

Perhaps the rollout of popular cannabis extracts and vape pens will pull some business away from an illicit market thats been providing popular extracts for years. Until theres proof these products wont simply cannibalize sales of less popular goods, though, its better to watch this show from a safe distance.

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Unfortunately, those expectations were badly misplaced. Aurora disclosed its Q4 numbers after Wednesdays close, and Wall Street did not react kindly. On the top line, the medical-cannabis specialist rang up $98.9 million CAD, which represented a 52% lift from the prior quarter. However, Aurora management forecasted Q4 sales to come in between $100 million CAD to $107 million CAD. As a result of the revenue miss, the ACB stock price tanked in after-hours trading.

After a nights rest to digest the news, the Street immediately hit the sell button. Due to the mini-panic, Aurora Cannabis stock closed Sept. 12 below the $6 level. From a technical perspective, this was an unfortunate development. ACB stock was finally looking interesting since the beginning of this month. Now, questions have sprouted about this once-vaunted cannabis player.

Another factor that has raised concerns among investors is Auroras international business. One of the biggest investment arguments for Aurora Cannabis stock is its international footprint, the biggest in the sector. However, most of the companys financial performance comes from its local Canadian market.

But in Europe, for example, the company generated $4.5 million CAD in medical-cannabis sales. Thats up 12%, a very modest rate compared to its Canadian growth rate. With management continuing to make high-dollar investments, can ACB stock survive?

Heading into the Q4 earnings report, the ACB stock price had robust technical momentum. At the same time, on a fundamental basis, the organization was going up against a wall of pressure.

Primarily, every other major cannabis player had failed to impress the Street. Unlike in late 2017, Aurora Cannabis stock and its ilk did not benefit from the honeymoon effect. Cannabis investments no longer moved on compelling narratives, such as Canada legalizing recreational weed. Instead, prospective buyers were placing extra attention on the boring stuff, like fiscal sustainability.

That created a major problem. Let me be blunt: There are two reasons why mainstream financial institutions take a pass on cannabis-related businesses. First, legal uncertainties — and political controversies — surround the sector. Second, the financials for most of these names are rough.

And thats been the story for Aurora Cannabis stock and its peers throughout this year. Undoubtedly, Aurora and the rest of the marijuana market offer tremendous potential in their narratives. For example, if the U.S. legalizes marijuana, it changes the calculus for ACB stock.

But before the narrative comes the reality. While Auroras revenue growth has been impressive on a mathematical scale, so has its debt load. Sure, companies like Aurora have healthy cash balances, in part due to strategic partnerships. Yet the concern is this: Aurora cannot keep spending without turning at least some of its narrative potential into hard results.

Ultimately, I think thats why the Street was so disappointed. The cannabis market has stepped out of the honeymoon phase and into the show me phase. In other words, investors are tired of hearing bedtime stories. Instead, they want some evidence that these tales are based on facts.

Part of being a good investor is knowing when to give up. Unlike sports, theres no such thing as a moral victory in the markets. Either youre making money or youre not.

Under this framework, Aurora Cannabis stock looks like a candidate to sell. And I dont blame you if you decide to go that route.

That said, heres the plain truth about ACB stock: No matter what anybody says about the financials, the play here has always been the narrative. When companies in established industries show the kind of quarterly results that Aurora does, you should jettison immediately — we know approximately the upper boundaries of traditional industries.

But we really dont know anything about marijuana. Maybe the segment peaked in Ottawa, and everybody else doesnt know it yet. Or, the U.S. and other regions will start opening the legalization door.

Clearly, Aurora Cannabis is banking aggressively on this latter possibility. Whether you believe in the same will determine how you approach ACB stock.

The post Here’s Why Aurora Cannabis Stock Stumbled appeared first on InvestorPlace.


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