The COVID-19 pandemic has been wreaking havoc on the economy for the better part of three months. As a result, many investors are increasingly looking for stability in a volatile stock market. And since most cannabis companies aren't consistently profitable -- and typically don't have anything resembling a timeline for when they will become profitable -- investors have been selling off shares of these businesses. Year to date, the Horizons Marijuana Life Sciences ETF (HMLSF -0.64%) -- a benchmark for the cannabis industry -- is down by almost 20%, while the S&P 500 is only down by 8%.
One cannabis company that has been making a lot of noise over the past couple of weeks or so is none other than Aurora Cannabis (ACB 8.70%). And with a series of headlines about this highly popular pot grower sending its stock on a bit of a roller-coaster ride, it is worth revisiting what has been going on with Aurora Cannabis lately.
Aurora Cannabis conducts a reverse stock split
Aurora posted a string of poor financial performances last year and earlier in 2020. Also, industrywide problems have been dragging down shares of cannabis companies since last year. As a result of these headwinds, Aurora's stock fell below $1 a share, and the company was at risk of being delisted from the New York Stock Exchange. The pot grower decided to take drastic action and conducted a reverse stock split earlier this month, thus decreasing its number of shares and increasing its stock price.
Each of Aurora's shareholders received one share for every 12 owned. Investors didn't seem particularly thrilled with this news, sending the stock down by about 8%. Still, that seems better than the prospect of being delisted from the New York Stock Exchange. At least this way, Aurora lives to fight another day.
Aurora Cannabis's third-quarter financial results
When Aurora released its financial results for the third quarter of its fiscal 2020 after the market closed May 14, it surprised many investors and analysts by sharing data that was at least somewhat encouraging. Here are a few key figures to consider from Aurora's latest earnings report:
- Aurora sold 12,729 kilograms of cannabis during its third quarter, a 34% increase compared with the second quarter.
- The company's total net revenue for the quarter was 75.5 million Canadian dollars, representing a 35% sequential increase.
- Aurora's adjusted loss before taxes, expenses, depreciation, and amortization was CA$50.9 million for the third quarter, compared with CAD$80.2 million during the second quarter -- a 37% improvement.
Aurora's shares skyrocketed on the heels of its third-quarter earnings release. But before rushing to buy shares of the pot company, it is important to acknowledge that some serious problems persist with Aurora Cannabis. Let's briefly discuss just two of them.
First, Aurora continues to lose money rapidly. The company's net loss during the third quarter was CA$137.4 million. Also, Aurora's loss from operations was CA$83.6 million. And operating expenses remain high (about CA$111 million during the third quarter), which is something investors should watch, especially given this challenging economic environment.
Second, Aurora's balance sheet is still not pretty. At the end of its third quarter, the company had about CA$2.4 billion in goodwill. This much goodwill on the company's balance sheet may lead to writedowns, which may, in turn, affect Aurora's already negative bottom line.
Aurora Cannabis remains too risky
Aurora's latest quarterly update was a step in the right direction, but it was just one step. The company has a long way to go before it becomes an attractive investment. In particular, Aurora will have to face its balance-sheet issues (goodwill and others), as well as significantly reducing its operating expenses. And while the cannabis company has a goal to become profitable on the basis of its earnings before interest, taxes, depreciation, and amortization (EBITDA) by the first quarter of its fiscal year 2021, that's not the same as turning in a net profit. In short, it may be worth keeping an eye on Aurora at the moment, but it's still not a good time to pull the trigger.