Aurora Cannabis (NYSE:ACB) lost a frightening amount of money during the last three months of 2018 and investors are justifiably concerned about more losses ahead. Despite posting heavy losses, management expects a sales explosion before the end of 2019 that could allow this giant Canadian cannabis producer to begin posting a profit by the end of the year.
Should investors brace for further losses ahead, or will Aurora Cannabis find a way to make ends meet before the end of 2019? Here's what you need to know to decide for yourself.
Reasons to relax
Aurora has some money to burn after issuing $345 million worth of senior notes in January. This should give the company some breathing room until 2024 when the notes become convertible into Aurora shares at $7.23 per share.
Aurora reported a 405 million Canadian dollar comprehensive income loss during the quarter ended December, but most of those losses were noncash adjustments to the value of securities and derivatives. Aurora's actual operations only lost $80 million, which was 28% less than operations lost during the previous quarter.
During the last three months of 2018, top-line revenue leaped 125% higher than the previous quarter to $59 million. If recreational cannabis sales continue rising throughout Canada, sales could jump again.
Reasons to remain extremely cautious
Since adult-use sales began, Canada's limited number of retail outlets have had more trouble stocking their shelves than Toys R Us stores in Venezuela. A handful of provinces have even curtailed the licensing of new retail outlets, citing a shortage of legal marijuana that doesn't actually exist. That should worry anyone with Canadian producers in their portfolio because Statistics Canada found only 35% of Canadians lived within 6.2 miles of an authorized outlet at the end of 2018.
Consumers aren't having trouble accessing legal weed because there isn't enough to go around. According to Health Canada, retailers complaining about supply shortages were only able to move 14,379 kilograms of product in December. In the same month, the amount of finished product held by all licensed members of the supply chain climbed to 57,914 kilograms, which is 31% more than the supply chain held when retail sales began in October.
One reason tons of legal marijuana that's already packaged and ready for sale isn't reaching consumers could be slim profit margins in the adult-use market that are pushing producers to supply international and domestic medical markets first. During the latest earnings call, Aurora's CFO, Glen Ibbott, said the company will meet contractual commitments to supply the adult-use market, but it won't go above that level while the company can earn twice as much by shipping products to international customers.
A likely cause for the holdup
The Canadian adult-use market has another problem that suggests Aurora won't experience a huge sales explosion in 2019. The provinces set prices, and they do a lousy job. According to Aurora's CEO, the provincial governments aren't interested in quality when setting prices, just weight. With retailers unable to lower prices to get aging products off the shelves, building a brand recognized for quality isn't going to be easy. Even if Aurora succeeds, it can't raise that brand's price accordingly without asking the provinces first.
Marijuana and its derivatives begin losing potency from the moment the flower's cut from the stem. That means minor inventory backlogs harm the brands that Aurora's trying to establish, and prolonged inventory backlogs could lead to serious writedowns across the industry. Aurora didn't share a measurement in kilograms with its fourth-quarter earnings report, but we know that the reported value of inventory shrank from $75 million at the end of September to $70 million at the end of December.
At the moment it doesn't look like Aurora's having problems moving its own inventory, but the company's mixed message about expecting enormous growth in 2019 doesn't jibe with the company's lack of interest in serving Canada's adult-use market with the inventory it does have. Management said it would meet its contractual commitments to supply adult-use marijuana in Canada, but not more due to slim profit margins.
Fingers crossed for Europe
It doesn't seem like recreational marijuana sales in Canada are going to be the big boost that pushes Aurora's sales over the edge this year. During Aurora's latest earnings call, management didn't have any answers for questions about why the supply chain is plugged up or when it might start flowing properly. Instead, the team tried to turn investors' attention toward new product lines and licenses to export cannabis produced in Canada to 21 international markets, including the Netherlands and Germany.
During the last three months of 2018, just 6% of Aurora's total revenue came from Europe, and sales from the region climbed just 1.8% compared with the previous quarter, to CA$2.9 million ($2.2 million), which isn't too encouraging. Although the 21 international markets where Aurora has licenses to ship marijuana are large, I wouldn't expect many customers in Mexico, Brazil, or Colombia to spend more for their cannabis than Canadians.
Aurora sold CA$59.4 million ($44.8 million) worth of cannabis during the last three months of 2018 and operations still lost CA$80.2 million ($60.5 million). There's a slight chance Canada will quickly learn how to regulate marijuana sales without impeding them, but I wouldn't bet on a quick improvement to stop Aurora's operations from posting another significant loss in 2019.