Aurora Cannabis' (ACB -3.65%) latest quarterly earnings suggest its aggressive strategy, which includes 25 acquisitions so far, is paying off. The company's sales are soaring, and with Canada's recreational market only four weeks old, the future appears bright. Is Aurora Cannabis a pot stock worth buying?

Breakneck growth

Aurora Cannabis sales skyrocketed 260% year over year and 55% quarter over quarter to 29.7 million Canadian dollars last quarter, and that doesn't include a full quarter of results at MedReleaf, a major competitor it finished acquiring in July. If you include a full quarter of MedReleaf, and results from other recently acquired companies, then Aurora Cannabis' sales increased by an eye-popping 333% to CA$35.8 million last quarter.

A marijuana leaf on a $100 bill on a table.


Canada's recreational market didn't open for business until October 17, either; so the company's quarterly results only hint at the opportunity associated with the country's emerging adult-use market. According to management, the quarter only included CA$553,000 in sales to wholesalers that were building inventory ahead of the recreational market opening. 

That means Aurora Cannabis' dramatic growth was almost entirely due to growth in active patients served by its medical marijuana businesses and, to a lesser extent, higher net selling prices for dried marijuana flower. Thanks to acquisitions, Aurora Cannabis exited September serving 67,484 active registered patients, up 250% year over year, and overall, those customers bought 2,676 kilograms of marijuana in the quarter, up 201% from one year ago. On average, Aurora pocketed $8.39 per kilogram of dried cannabis products sold, up 15% year over year.

On the bottom line, the company's cost-cutting efforts in its green houses helped boost gross margin to 70% last quarter from 58% one year ago, but the $104.2 million in net income the company reported was thanks to unrealized gains on investments. Specifically, it was a result of the company changing how it accounts for its investment in The Green Organic Dutchman. Aurora was recording that investment at cost, but now it's recording it as a marketable security at fair value following management's decision to sell some of its shares last quarter.

If you remove the positive impact of investment gains from its results, then the company is still losing money on an operating basis. General and administration costs were CA$35.9 million, up from CA$22.6 million in the prior quarter, and sales and marketing costs were CA$29.4 million dollars, up from CA$14.8 million in the prior quarter. Combined, those two line items totaled CA$65.3 million in the quarter, or 182% of Aurora Cannabis' CA$35.8 million in pro forma revenue.

What's next for the company

Aurora Cannabis is investing in next-generation marijuana facilities that can produce marijuana products cheaply at scale. Its current annualized production rate is 70,000 kilograms per year, but capacity should reach 150,000 kilograms per year by the end of 2018, or early in 2019.

The jump in capacity is mostly due to Aurora Sky ramping up. A next-generation greenhouse, Aurora Sky incorporates technology that lowers utility costs and labor costs. Eventually, Aurora Cannabis' believes it will be able to produce marijuana at less than $1 per kilogram at Aurora Sky. We should get some insight into how likely that target is next year, because management says all 17 rooms in Aurora Sky will be "ready to receive plants within the coming month, and the facility [will be] fully planted around calendar year end."

This additional capacity is key to meeting adult-use demand in Canada, which, so far, is outpacing supply. In addition to producing more dried flower, the company is also making investments in the marijuana products it sells. For instance, it launched Aurora Cloud, a potent, vape-ready CBD oils product line last month, and according to management, Aurora Cannabis has "the only vape-ready CBD products legally available in Canada."

The company has also taken steps to produce more single-rolled products. On August 1, the company acquired licensing rights from CannaRoyalty for "pre-rolled cannabis technology developed by Wagner Dimas Inc." This technology enhances the company's ability to produce pre-rolled products at scale, and management is already fulfilling orders from provincial buyers for the adult-use market using it.

Marijuana growing in a green house.


Is this pot stock a buy?

There are likely to be growing pains as supply tries to catch up to demand in Canada, but those bumps are likely to be temporary. According to Deloitte, the adult-use market in Canada could be worth as much as CA$4 billion in 2019, so there's a big opportunity for Aurora Cannabis' revenue to accelerate from here.

The opportunity outside Canada, though, is worth $150 billion annually, including roughly $50 billion in the United States. Aurora Cannabis isn't going to enter the U.S. market until prohibition ends at the federal level, but that may only be a matter of time given that 33 states have legalized marijuana in one form or another, and most Americans favor legalization.

In the meantime, Aurora Cannabis is concentrating on other markets, including Germany and South America. It recently acquired ICC Labs in order to leapfrog the competition to become a major South American supplier to Uruguay, and as of last quarter, it's the biggest distributor of medical marijuana in Europe.

Tapping into global markets won't be cheap, but Aurora Cannabis is stockpiling resources. Its cash stockpile is CA$147.8 million, its marketable securities portfolio is worth over CA$400 million, and it has access to up to a CA$250 million line of credit. 

It's anyone's guess who will come out on top in this emerging market, but with plans in place for 500,000 kilograms of annual production, it's hard to argue against Aurora Cannabis' being a major player. Management says its share of the adult-use market in Canada's largest province -- Ontario -- was 30% through October 31, and if that's any indication, then the future for this company is bright enough to warrant including some in long-haul growth portfolios.