Please ensure Javascript is enabled for purposes of website accessibility

3 Most Important Takeaways From Aurora Cannabis' Quarterly Results

By Todd Campbell – Updated Apr 18, 2019 at 12:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Marijuana stock investors need to know these facts before buying or selling shares in this top pot stock.

Aurora Cannabis' (ACB 0.82%) is targeting 570,000 kilograms of cannabis production someday, and that goal has it neck-and-neck with Canopy Growth (CGC 6.59%) in the race to be the world's top pot stock. The company's fiscal second-quarter results, which were unveiled Monday night, provide important insight into Canada's fledgling recreational marijuana market. Here are three things every marijuana stock investor ought to know exiting the first quarter of adult-use marijuana in Canada.

No. 1: Big market, plenty of room

Aurora Cannabis already provided a glimpse of its quarterly performance in early January, so its top-line sales of $54 million Canadian dollars weren't too surprising because its guidance was for CA$50 million to CA$55 million. What was surprising is that Aurora Cannabis said it estimates its CA$21.6 million in recreational sales translated into market share of about 20% last quarter.

A man listening through a wall using a plastic cup

IMAGE SOURCE: GETTY IMAGES.

Its market share is low enough to suggest it has plenty of opportunity to chip away sales from competitors, yet high enough to suggest significant sales increases are in its future even without competitive wins. Even if Aurora Cannabis doesn't win any more of the remaining 80% market share, its 20% share translates into a CA$1.2 billion opportunity given that Canadians spend about CA$6 billion on marijuana annually, according to Statistics Canada.

No. 2: Ignore the bottom line (for now)

The company's net loss dwarfed sales last quarter. Despite reporting a 430% year-over-year increase in net revenue to $54.2 million and a 363% year-over-year increase in net cannabis sales to $47.6 million, Aurora Cannabis' net loss skyrocketed to CA$238 million.

There were a few things that contributed to that big number. First, the company realized lower prices on cannabis sold because recreational prices are generally lower than medical marijuana prices. Second, the company's product mix shifted away from extracts to dried flower last quarter, which has a lower margin. Sagging stock prices in the quarter were the biggest reason for the big loss, though. The company has investments in other marijuana companies, and under international financial reporting standards, it must adjust its bottom line up or down based on the change in value of those investments from quarter to quarter.

In the quarter, the average net selling price of dried cannabis and cannabis extracts declined to $6.23 and $10 per gram, respectively. Contributing to that drop was lower wholesale pricing for adult-use sales and the introduction of an excise tax, which Aurora Cannabis has decided to absorb. At the same time, it cost Aurora Cannabis $1.92 to produce every gram last quarter -- a $0.47 jump from the prior quarter. It blamed that increase in cost on "temporary inefficiencies during the scale up production at Aurora Sky as well as increased labor and inventory management cost and preparation from consumer legalization in October."

Aurora Cannabis also said that cannabis extracts only accounted for 22% of revenue, down from 31% in the prior quarter. That's because of "temporary oil extraction capacity constraints at our [existing] facilities as we move through a rapid scale-up."

Overall, marijuana stock price volatility can't be controlled, and it's likely to continue, so it's probably best for investors to ignore the impact of it on profit. Instead, investors will want to watch product mix, pricing, and cost of production trends from here. Management says product mix will improve over time, and that costs will fall as investments in new production capacity scale, but investors will want to see evidence of that over the coming quarters.

Marijuana buds in front of a U.S. flag

IMAGE SOURCE: GETTY IMAGES.

No. 3: A plan for the U.S.? Not yet

Aurora Cannabis' biggest competitor, Canopy Growth, has already announced a strategy to enter the U.S. via a license to process hemp in New York, so industry watchers were right to ask Aurora Cannabis' management on their conference call if it has a U.S. strategy, too.

For now, the answer appears to be "wait and see." Aurora Cannabis reminded investors that while the change to regulating hemp at the federal level is an important development, there are still lots of questions surrounding creating and distributing hemp-derived products. Aurora Cannabis says it's "on top of that market," and that it's "very well versed in the hemp industry and will enter when it's proper to enter and when it's legal to enter into the United States market."

So, for now, a need for patients might be the biggest takeaway for investors eager to see Aurora Cannabis tap the $50 billion U.S. marijuana market. 

Check out the latest earnings call transcripts for companies we cover.

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.23 (0.82%) $0.01
Canopy Growth Stock Quote
Canopy Growth
CGC
$2.91 (6.59%) $0.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.