So you think the cannabis sector has seen its worst? That there's no coming back? Well, here's a twist: The COVID-19 pandemic might have dragged down most sectors, but it is lifting up marijuana stocks for sure. Cannabis sales skyrocketed in April amid the pandemic, pushing companies' revenues higher. In fact, most marijuana businesses reported good revenue numbers this quarter. But one, in particular, seems to have risen from the dead.
A phoenix from the ashes
Edmonton, Alberta-based Aurora Cannabis (ACB -2.79%) saw strong demand after Canada legalized recreational marijuana in 2018. The company ramped up its production facilities, paying little attention to its rising debt. External factors including black-market sales and a slow rollout of stores post-legalization made it harder for the company to make a profit; ultimately, investors lost trust, and the stock kept sinking below $1 -- to the point that it was at risk of being delisted from the New York Stock Exchange.
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In May, however, Aurora seems to have risen from the dead. To save its stock and strengthen its cash position, it consolidated its shares in a 1-for-12 reverse stock split. Surprisingly, its third-quarter results were a hit. The company recorded year-over-year revenue growth of 16%, to 75.5 million Canadian dollars. It also reported sequential quarterly sales growth of 35%.
Its Q3 consumer cannabis revenue was up 24% sequentially to CA$41.5 million; that included its Daily Special brand, launched in February, and a few of the cannabis 2.0 products, launched in December. Medical cannabis revenue also increased by 13.5% sequentially. Management said they didn't see much impact from Covid-19 in the third quarter, but they do expect it in Q4.
Despite a good quarter, it's smart to be skeptical. Q3 results can't hide the fact that despite rising revenues, Aurora reported negative EBITDA (earnings before interest, taxes, depreciation, and amortization) of CA$50.8 million in Q3. Selling, general, and administrative (SG&A) expenses in the third quarter came in at CA$75 million. Management assured investors that Aurora is working to reduce SG&A and hit positive EBITDA by Q1 2021, but analysts remain skeptical.
Making it more exciting: A strategic acquisition in the U.S. CBD market
Aurora Cannabis is marking its entry into the U.S. cannabidiol (CBD) market with the acquisition of hemp-derived CBD company Reliva. The deal will leave Reliva's shareholders with $40 million worth of Aurora's shares, and that number could rise to $45 million over the next two years if Reliva achieves certain financial targets. The transaction will close by June.
What worries me is that Aurora might be reliving its past mistakes. Not even a month ago, it was drowning in debt, and now it's making acquisitions? Don't get me wrong; the U.S. CBD market is a rising star. It's just that these products still face doubts from the U.S. Food and Drug Administration (FDA), which seems hesitant about the use and marketing of CBD products in the U.S.
That said, striking a deal with a company that has no debt and a strong market position in the U.S. -- Reliva boasts 20,000 retail stores -- could prove to be a wise move. Reliva also generated positive EBITDA over the past 12 months, ending in March. Reliva's U.S. management team will be part of Aurora, and that might just help the latter company, given that its current leadership team has proven questionable.
Recently, Canopy Growth (CGC -1.01%) also announced the launch of its next batch of cannabis 2.0 products -- cannabis-infused beverages, chocolates, and vapes. Canopy Growth, along with its partner, Constellation Brands (STZ -0.37%), expects to capture a new range of customers with its innovative products.
Achieving profitability is what matters
Shares of Aurora and Canopy are up 106% and 16%, respectively, so far in May, while the SPDR S&P 500 ETF (SPY 0.92%) has declined by 4.1%.
The stock volatility could drag on with the market uncertainty around the pandemic. What matters to cannabis investors is whether Aurora can sustain its promises, manage to reduce expenses, and hit profitability within the stated time frame. Aurora's entry into the U.S. CBD space and its innovative cannabis 2.0 products present a good opportunity for the company to recover in 2020.
