Marijuana is liable to be one of the fastest-growing industries of the upcoming decade. Even if the pie-in-the-sky sales figures put forth by investment bank Stifel of $200 billion in annual sales by 2030 don't come to fruition, we'll likely see a fivefold to tenfold increase in legal worldwide weed revenue over the next decade.
Among the many pot stocks for investors to choose from, Aurora Cannabis (NYSE:ACB) is often touted as the industry favorite. Should you need proof of Aurora's popularity, it was crowned the most-held stock on millennial-dominated investing app Robinhood earlier this year.
There are a number of factors that attract investors to Aurora Cannabis. There's its leading marijuana production, its global reach, and its focus on high-margin medical marijuana patients. I'd also opine that its single-digit share price plays a role. Despite being a mid-cap company with 1 billion shares outstanding and a $3.7 billion valuation, the company's $3.58 share price looks aesthetically and psychologically appealing to retail investors.
It's nearly earnings time for Aurora, but its headline numbers shouldn't be the focus
But as with all publicly traded companies, worth is ultimately determined by operating results. With Aurora soon set to report its fiscal first-quarter operating results, we'll get an intricate look under the hood of the industry's top-producing marijuana company.
As expected, Aurora should find the sledding difficult given the many regulatory and procedural issues currently affecting the supply of marijuana in Canada. For instance, Health Canada's inability to effectively work through its enormous licensing backlog, as well as select provinces slow-stepping the rollout of physical dispensaries, is expected to have adversely impacted Aurora's sales growth and push toward profitability in the first quarter. But, truth be told, this is a problem impacting the entire industry and isn't an issue that's specific to Aurora.
When Aurora does dish on its Q1 results, Wall Street and investors will likely look for a modest increase in sequential quarterly revenue, perhaps a slight decline in net operating loss (excluding one-time benefits and costs), and a boost in overall production.
However, these aren't the figures that are going to move Aurora Cannabis' share price in the interim. Rather, there are three under-the-radar figures that bear a lot more importance than your typical headline operating numbers.
1. Aurora's international sales
One of the top selling points of the Aurora Cannabis investment thesis is that the company has production, research, partnership, or export agreements in place with 25 countries, including Canada. With the exception of Tilray and Canopy Growth, no other growers surpass a reach of one dozen countries. Given that we've seen how oversupply and commoditization have ravaged per-gram dried flower pricing in states like Oregon, the belief is that these external sales channels will prove pivotal in protecting Aurora's margins.
What's more, with only Canada and Uruguay having given the green light to adult-use marijuana, through the end of October, these foreign markets are, therefore, hotbeds of high-margin medical marijuana patients. Medical pot patients use more frequently, buy product more often, and are more willing to purchase high-margin derivatives, relative to recreational weed users, according to Canadian surveys.
Unfortunately, Aurora only managed to generate 4 million Canadian dollars in fiscal third-quarter international sales, and CA$4.48 million in fiscal Q4. Some of this sales weakness has to do with the company still developing its European cultivation assets, but it may also imply that growers like Aurora will be unable to ship a lot of its product overseas until domestic demand is satisfied (which may take a while).
What investors will want to keep their eye out for is substantive sequential quarterly growth in international sales. Since these overseas sales channels are the future for Aurora Cannabis, growth will need to pick up very soon if the company is to hang onto its lofty valuation.
2. Wholesale cannabis revenue
Another under-the-radar number that investors should be especially mindful of is the company's wholesale cannabis revenue. Wholesale pot is production that's being sold to another marijuana company or grower at wholesale prices, rather than retail sale prices.
To be perfectly clear, wholesale pot sales are to be expected as the Canadian marijuana industry matures. Not all growers have completed their cultivation projects, and, as noted, some growers might be waiting many months, if not longer than a year, to get the green light from Health Canada to plant, harvest, and sell their weed. In order to meet existing supply agreements, some companies (ahem, Tilray) may be forced to seek out cannabis for purchase at the wholesale level to temporarily supplement their supply.
Right now, no marijuana company is producing as much cannabis as Aurora. During the fourth quarter, ended June 30, production topped 29,000 kilos, with the company touting an annual run rate of at least 150,000 kilos. This, presumably, gives Aurora some leeway to move product via wholesale deals.
But there's a downside, too. These wholesale deals have less attractive margins than the consumer retail market, and in the fourth quarter, Aurora's wholesale bulk net revenue jumped to CA$20.1 million from just CA$2.1 million in Q3 2019. While it's good that Aurora is moving product, the margins it receives from wholesale cannabis aren't all that enticing.
What investors should monitor is the amount of net revenue generated from wholesale marijuana in the upcoming quarterly report. Though a large increase could be mostly benign and simply signal its production advantage to this point, it might also be indicative of what few avenues the company has to get product to market, for the time being.
Third and finally, it's imperative that investors keep a watchful eye on the company's goodwill.
In simple terms, goodwill represents the premium that a company pays, above and beyond tangible assets, when making an acquisition. In Aurora's case, it's made more than a dozen acquisitions since the summer of 2016, leading to an aggregate of CA$3.17 billion in goodwill being recognized on its balance sheet. This CA$3.17 billion accounts for 58% of the company's total assets.
In a perfect world, Aurora would be able to build out the infrastructure of its acquired businesses, monetize their patents, and completely recoup the premium it's paid. However, following a recent amendment to a major acquisition by Curaleaf this past week, it's become painfully obvious that pot stocks have grossly overpaid for their acquisitions over the past couple of years. This makes it increasingly likely that Aurora will be forced to write down some portion of its goodwill in the not-so-distant future.
When the company does report its Q1 results, investors should note how much goodwill Aurora is lugging around on its balance sheet (the figure changed ever-so-slightly in the sequential quarter), and see if this amount has increased or decreased relative to the company's total assets. Already at 58% of total assets, any increase would have to be considered worrisome news.