As recently as 10 years ago, the idea of recreational marijuana being legalized would have been somewhat laughable. In the U.S. in 2009, just 44% of survey-takers favored the idea of a broad-based legalization, according Gallup, and not a single country in the world had passed a law allowing the consumption of recreational cannabis.
But what a difference a decade makes.
Today, 2 out of 3 Americans support a broad-based legalization of marijuana, with more than 9 out of 10 favoring the idea of physicians being able to prescribe medical cannabis to patients. Further, over 40 countries worldwide have legalized medical pot, with two -- Canada and Uruguay -- allowing adult-use sales. Canada is of particular interest since it's the first developed country to give the nod to recreational cannabis.
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Aurora's secret weapon: Its international push
From this game-changing legalization has sprouted a legitimate cannabis business model, of which only a few names have really separated themselves from the pack. One such company is Aurora Cannabis (ACB +2.45%), which is arguably the top pick among millennial investors.
Wall Street and younger investors are being lured to Aurora because of its industry-leading production potential. Although it has a couple of massive organic projects, including a 1.62-million-square foot grow farm in Medicine Hat, Alberta, known as Aurora Sun, and its state-of-the-art, 800,000-square-foot Aurora Sky facility, acquisitions have played an arguably bigger role in capacity expansion. None of these buyouts will prove more transformative than the $2 billion purchase of Ontario-based MedReleaf last July.
But what investors may be overlooking is a strategy component that's even more important than how much marijuana Aurora Cannabis can produce -- namely, the company's overseas expansion strategy. Right now Aurora has a growing or distribution presence in 24 total countries, including Canada. That's far and away more than any of its peers. But there are some nuances about its international strategy that you should be aware of.
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1. International expansion targets a higher-margin consumer
The first thing you'll want to know is that Aurora's push into international markets is all about boosting its long-term operating margins. Whereas most growers are hell-bent on gobbling up as much recreational market share as possible, Aurora Cannabis' brass has been clear that the company's focus will be on medical marijuana patients going forward.
In return for giving up on a larger pool of consumers in favor of a smaller group of medical patients, Aurora's reward is the potential for much higher operating margins. That's because, according to the fourth-quarter National Cannabis Survey in Canada, medical pot patients use marijuana more frequently than recreational users; buy more often than adult-use consumers; and are far more willing to buy cannabis derivatives, such as oils, which feature higher price points and juicier margins than traditional dried flower.
As noted, while there are two countries that have legalized recreational weed worldwide (and perhaps soon to be three, with Mexico seemingly to be close to legalization), there are over 40 countries globally that have given medical weed the green light. That's a budding market for Aurora Cannabis to tend to, and it should be a solid decision over the long run.
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2. Expanding overseas would be easier if Aurora had a brand-name partner
Of course, one of the downsides of expanding internationally is that it isn't cheap to do so. Laying the groundwork to grow or distribute marijuana in foreign markets can cost a pretty penny, which Aurora's shareholders have found out the hard way.
With only modest levels of cash on hand due to limited access to basic banking services until the last couple of months, Aurora Cannabis has regularly turned to the secondary markets for capital raises. In essence, it's been selling its common stock or offering convertible debentures to raise cash, or has simply been financing overseas acquisitions or investment stakes entirely through common stock issuances. While this does get the job done, Aurora has seen its outstanding share count balloon from 16 million shares at the end of fiscal 2014 to more than 1 billion as of today. Sure, Aurora's market cap has grown substantially, but shareholders haven't received nearly the return they'd expect as a result of this share-based dilution.
Furthermore, expanding internationally would be a lot easier if the company had a brand-name partner like Canopy Growth does with Constellation Brands, or Cronos Group does with Altria. Without a partner, Aurora will have to rely internally for its marketing prowess and expansion costs. Then again, with the addition of billionaire activist investor Nelson Peltz as a strategic advisor, it shouldn't be long before Aurora Cannabis lands a global partner to help with its long-term international play.
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3. It'll be years before any significant benefits are seen from Aurora's push overseas
Third and finally, you should know that Aurora's international push isn't going to pay immediate dividends. In fact, there's a pretty good chance it's going to take years before the company's international strategy really begins to pay off.
For most Canadian cannabis growers, the impetus to look overseas has to do with the expectation that dried cannabis flower will become oversupplied and commoditized by, say, 2021 or 2022, when many of the supply chain kinks are fixed in Canada. In the U.S., we've witnessed many of the recreationally legal states contend with oversupply and precipitously falling per-gram dried flower prices, which is expected to happen in Canada, too. As long as producers have an ample number of external sales channels in place, they should be able to avoid serious damage to their gross margin as the result of weakening dried flower pricing in the domestic Canadian market.
Aurora's competitive advantage with regard to having a presence in two dozen total markets probably won't come into play until we really begin to see this commoditization of dried cannabis pick up in Canada. That could happen in less than two years, or it might even take longer than three years, depending on how quickly Health Canada works through a backlog of cultivation licenses and sales permits.
In sum, looking overseas is a wise move for Aurora, but you'll have to be patient as an investor for this strategy to pay off.
