Please ensure Javascript is enabled for purposes of website accessibility

Can Aurora Cannabis Stock Rebound in 2020?

By Sushree Mohanty - Aug 2, 2020 at 10:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Has this Canadian pot company done enough to convince investors that it can come back from its disastrous 2019?

Aurora Cannabis (ACB 10.00%) has been a favorite of investors for a while now, and expectations are high that the company will be able to recover from a dismal 2019.

The rate at which Aurora expanded after Canada legalized medical cannabis in October 2018 convinced everyone that it could become the top player in this growing industry. However, some of its own mistakes -- going too fast, too soon; spending money on expansions and acquisitions without paying attention to rising debts -- along with external headwinds brought Aurora's stock down more than 78% from its March 2019 highs. 

So far, 2020 has somehow been lucky for the company, which does seem to be on a path to recovery. Let's shed some light on its efforts this year.

Red bar lines increase in height as arrows point ahead.

Image source: Getty Images.

The cost-cutting measures continue

Aurora expects that what it calls its "facility rationalization plan" will help it reduce expenses and improve margins. In June, it announced the closure of five of its smaller facilities, and it also intends to merge several other facilities into one by the second quarter of 2021, while ramping up operations at its Nordic facility in Europe. These changes will cost Aurora asset impairment charges of up to 60 million Canadian dollars in the fourth quarter of 2020, but will help it achieve its SG&A run-rate target of CA$42 million for the fiscal first quarter of 2021.

What should Aurora's strategies be going forward?

Aurora's move to expand its business internationally in markets that haven't reached their full potential was a big risk. In my opinion, Aurora should instead pay attention to its operations in Canada that could improve this year -- especially with more stores opening in Ontario, which just saw its 100th retail store authorization last month.

It should also look at expanding in U.S. markets that have seen tremendous growth. Currently, 33 states and the District of Columbia allow medical cannabis, and 11 states and D.C. allow recreational cannabis use among adults. A handful of additional states have some form of legalization on the ballot this year, which may expand the markets further. 

A BDS Analytics report predicts that recreational markets in California, Nevada, and Massachusetts could grow at a compound annual growth rate of 20.8% and generate 41% of total U.S. legal cannabis sales in 2024. Furthermore, new markets including Arizona, New York, and Florida, if and when they legalize, could capture 32% of the 2024 market.

Aurora's recent acquisition of Reliva -- the proud owner of 20,000 retail stores -- can help the company widen its footprint in the U.S., where the growth of the marijuana market is evident from Illinois-based Green Thumb Industries (GTBIF 1.00%) and Florida-based Trulieve Cannabis's (TCNNF -0.08%) most recent quarterly performance. These pot companies' strategies of focusing on their local business has proved beneficial. 

In Q1, Green Thumb's revenue soared 268% from the year-ago quarter to $102.6 million, while Trulieve's revenue rose 116% to $96.1 million. Both also reported positive EBITDA of $25.5 million and $49.4 million, respectively.

Aurora should also keep an eye on peer Canopy Growth's strategies in launching cannabis derivatives products in the U.S. Aurora has fallen behind in striking a deal with any of the consumer alcohol or tobacco companies that could help strengthen its position in the U.S., while Canopy Growth has a deal with Constellation Brands and an additional deal to purchase Acreage Holdings once the U.S. federally legalizes marijuana. Meanwhile, HEXO has a partnership deal with Molson Coors Beverage Company, and Cronos Group has a deal with tobacco giant Altria Group

Is it worth the risk?

Management assured investors on Aurora's third-quarter 2019 earnings call that it would hit profitability by the fourth quarter of fiscal 2019, but instead, it reported a loss of CA$36.6 million. Losses kept mounting thereafter, and the company's history of promising and not delivering makes it extra hard to trust.

Then again, the cost-cutting strategies to achieve positive profitability this year look like they could work. So I would at least wait for fourth-quarter results, expected Sept. 25, to learn more about how its strategies have worked out so far and its plans for the future.

Meanwhile, I wouldn't suggest Aurora Cannabis as a buy, but investors who already hold the stock might as well keep it. There are other profitable pot stocks out there, though, inluding Aphria (APHA) , which has consistently reported positive EBITDA and takes a more conservative approach to its business. I have always liked Aphria's focus on its core operations, which I think is the reason it has maintained profitability. It reported EBITDA profits of about CA$9.3 million with 18% revenue growth to CA$152.2 million for its recent fourth quarter, reported on July 29. The U.S. cannabis companies, as stated above, have proved their potential this year and are also in a much better place than Aurora Cannabis.

 

Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Green Thumb Industries. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.65 (10.00%) $0.15
Canopy Growth Stock Quote
Canopy Growth
CGC
$3.28 (21.48%) $0.58
Green Thumb Industries Stock Quote
Green Thumb Industries
GTBIF
$10.10 (1.00%) $0.10
Aphria Stock Quote
Aphria
APHA
Trulieve Cannabis Stock Quote
Trulieve Cannabis
TCNNF
$13.11 (-0.08%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.