The dot-com bubble almost two decades ago inflicted painful stock losses on historically bullish investors. Mega-caps like Apple saw its equity crash, only to later grow far beyond once expensive valuations. New products were in inning one of a fruitful road to ubiquity. I believe a similar opportunity is materializing in the cannabis sector today.

In Canada, federal legalization is in year two of its highly publicized rollout. Sky-high expectations led to ridiculous valuations and returns for investors early on. Since then, store bottlenecks and product limitations led to a series of industry disappointments and huge stock tumbles.

bull and bear

Getty Images

Just like the QQQ Nasdaq ETF tanked 80% from peak to trough after 2001, the MJ Cannabis ETF fell nearly 80% since 2019. Just like for technology 20 years ago, help for the cannabis industry is on the way as well.

Improving environment

As much as these companies were overvalued in the past (2018-2019), that is how undervalued they are today. With cannabis being designated as essential in Canada, store openings continued and the bottle necks that plagued producers actually eased. Early on, Canada used a lottery system that drastically slowed store rollouts in the country.

A lottery meant licenses were awarded based on luck of the draw instead of quality of application, blocking some applicants ready to open stores from doing so. That has since been solved, with licenses now awarded to those most capable of success. The Result? Ontario, the most populous province in Canada, saw total retail stores grow 50% (from 40 to 60) in recent weeks, with 292 more in progress. Since the beginning of April, the country has added 50 dispensaries total with hundreds more planned.

This makes regulated cannabis incrementally more available to consumers compared to the black market. If there are no stores, people will continue purchasing product less safely, with less oversight and with no tax revenue for the Canadian government. Thanks to shops, people have access to safer product, and extensive educational resources via employees.

I am not saying the next Apple will be born out of tough times for the cannabis industry. I am, however, confident that there are quality companies that will thrive when the storm dissipates. To me, Aurora Cannabis (NYSE:ACB) is best in breed to win going forward.

Poised to gain

Aurora's low production cost of $0.85 Canadian dollars per gram ($0.61 USD) gives it pricing flexibility with products. While a few other companies produce for less than CAD$1, many are well above that mark. This enabled Aurora's newly introduced value brand, leading directly to a large beat in first quarter sales.

Inventory has swelled, but industry low growing costs equip Aurora with the ability to profitably adjust by undercutting legal and illegal competition if need be. They finally hit the sweet spot in cost that rivals black markets but with quality and consistency that far exceeds it. That is the recipe for success going forward.

Another tide that will lift all Canadian producer boats: Cannabis 2.0, a program started in January. Licensed companies can now sell higher-margin derivative products to medical and recreational consumers. Not only will this help profit ratios, but it opens the door for new consumers too.

Combustible products are just not appealing for some. An edible, drinkable or trans-dermal means of consumption is simply less intimidating, and more approachable to many. Aurora Cannabis has extensive product lines within cannabis 2.0 categories that are performing well early on.

Easing concerns

Aurora's sales multiple of 6 is among the cheapest in the industry. Investors have well-placed liquidity concerns, but so far so good. The cannabis company renegotiated and relaxed debt covenants to add flexibility to their balance sheet and buy time. Aurora muted concerns further by bolstering access to credit revolvers. Banks are clearly working with this company.

CEO Michael Singer  is confident they remain on track for positive EBITDA by the first quarter next year, well before many. Through the pandemic Aurora's cash position actually grew and cash burn improved sizably. To me, this depicts a company capable to getting to positive cash flow, thanks to flexibility among creditors.

Revenue growth of 18% this quarter is nice, but only the beginning. As retail infrastructure expands and new countries legalize I am confident that number will improve. Another secret weapon for juicing sales: Aurora's recent acquisition of Reliva. This gives Singer's team much needed exposure to the American CBD market. Aurora announced the new revenue stream will be accretive to EBITDA immediately. 

For the Canadian cannabis industry, frothy investor confidence turned ugly, quickly. The dot-com bubble left us with great opportunities at compelling valuations; a similar cannabis falling out has already occurred and I plan to take advantage with Aurora. All producers have a near-term addressable market growing and long-term demand trajectories still promising success. Aurora has the goods to maximize these bullish trends.