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Why Aurora Cannabis Will Post a Profit in 2020

By David Jagielski – Updated Jul 30, 2020 at 5:05PM

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Could the company finally be on the right track?

Profitability is something many cannabis companies struggle with, and Aurora Cannabis (ACB 3.25%) is no exception to that. Its mounting losses have weighed on investors' minds -- and on the stock itself, which is down 87% in the last 12 months while the Horizons Marijuana Life Sciences ETF (HMLSF 0.51%) has fallen by 65%.

But Aurora's intent on improving its bottom line, and the company's been making moves recently in an effort to get it closer to breakeven. Here's why investors should expect Aurora to record a profit later this year.

The company's continuing to shed expenses

When Aurora released its third-quarter results of fiscal 2020 on May 14, the company made it clear that profitability was its target. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) loss for Q3 was 50.9 million Canadian dollars. That was better than the CA$80.3 million loss that it reported in the second quarter, but still nowhere near breakeven.

A bag of money.

Image source: Getty Images.

But Aurora is looking to make even more changes to get itself closer to posting a profit. In Q3, it stated that its selling, general, and administrative (SG&A) expenses were at a run rate of CA$55 million. By the end of the fourth quarter, Aurora plans to trim that down so that they're no more than CA$45 million. It looks as though it's making progress, as in a corporate update dated June 23, Aurora announced that it expects its run rate for SG&A in the current quarter to come in at around CA$42 million.

The Alberta-based pot producer also said that it would be closing five of its facilities sometime during its next two quarters. The company says that it will be focusing its efforts on "highly efficient sites." Aurora will also be laying off approximately 700 workers.

In February, the company announced that it was laying off 500 people from its workforce and that CEO Terry Booth would be resigning. The company's executive chairman, Michael Singer, has since taken over the CEO position.

Aurora can't afford to miss another profit projection

There's too much at stake for Aurora not to pull out all the stops to post a profit this year. For one, the company stated in Q3 that it's on track toward a positive EBITDA number by the first quarter of 2021 -- which runs from July through to the end of September. Last year, Aurora released its Q1 results in November.

A year ago, on the company's third-quarter earnings call, Aurora also said that it was on track to EBITDA profitability by the fourth quarter of fiscal 2019. It fell short of those expectations and reported an adjusted EBITDA loss of CA$11.7 million.

It also disappointed investors when its revenue of CA$98.9 million came in below what the company was projecting just a month earlier -- that sales would come in between CA$100 million and CA$107 million. 

Another disappointing result this time around would likely turn off even more loyalists who've stuck with the company during these challenging times. That's why I'd expect to see the cannabis producer do everything it must in order to hit breakeven to avoid another embarrassing result. Another failure would make it difficult for investors to continue believing the company's projections.

Should you invest in Aurora?

If Aurora does post a profit this year, as it expects to, the pot stock could take off. The problem, as with everything in the cannabis industry, is that there aren't any guarantees and there is a great deal of volatility. While I expect it'll post a positive EBITDA, I also wouldn't be surprised if something derails Aurora's progress toward profitability, given that there's a pandemic and a recession taking place in Canada. And even narrowly missing breakeven could send the stock into a tailspin.

If you're holding shares of Aurora, you may as well hang on, but if you're a new cannabis investor, there are safer stocks that you can invest in today, ones that are already profitable.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.27 (3.25%) $0.04
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$4.48 (0.51%) $0.02

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