Aurora Cannabis' (NYSE:ACB) is targeting 570,000 kilograms of cannabis production someday, and that goal has it neck-and-neck with Canopy Growth (NYSE:CGC) 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.
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.
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.