For years, there wasn't a hotter investment on Wall Street than cannabis stocks. Through the end of the first quarter of 2019, investors could do no wrong. The expectation of ongoing legalizations in the U.S., capacity expansion, new product launches, and acquisitions, proved more than enough to send pot stock valuations into the stratosphere.
The past 16 months haven't been as nice. Though last month was relatively kind to a dozen well-known weed stocks, a handful of popular marijuana stocks have been absolutely pummeled. Perhaps none more so than Aurora Cannabis (NYSE:ACB).
Aurora, the most-popular cannabis stock among millennial investors, has declined from a reverse-split-adjusted price of almost $120 a share in mid-March 2019 to less than $11 a share, as of Tuesday, Aug. 4, 2020.
If you're a current shareholder of Aurora Cannabis or have been contemplating buying in, here are the six numbers you'll absolutely want to be focusing on.
1. Cash cost to produce per gram sold
Though most folks are solely focused on headline figures, like net sales and net income/loss, the first number you'll want to know as a shareholder or prospective investor in Aurora is the company's cash cost to produce per gram sold.
Recently, Aurora Cannabis announced in a cost-saving move that it would be closing five of its smaller production facilities. This comes after the company sold off the 1-million-square-foot Exeter greenhouse that was never retrofit for cannabis production, and halted construction on two of its larger projects (Aurora Nordic 2 in Denmark and Aurora Sun in Alberta).
Aside from simply trimming costs to backpedal toward profitability, shuttering these smaller facilities is a ploy to allow Aurora Cannabis to take advantage of economies of scale. This is to say that larger cultivation farms should offer lower production costs -- and lower per-gram production costs would be expected to boost margins.
Aurora's margins all start with its cash costs to produce cannabis per gram sold.
I'd caution investors not to get too wrapped up in how many kilograms of weed Aurora is producing each quarter. A much more relevant figure that'll put the company's output into the proper context is its inventory.
All marijuana stocks should have a healthy amount of inventory on hand to take advantage of increased demand, improved pricing, and exports to overseas markets. But having too much inventory can be problematic. Excess inventory is sometimes discounted heavily in order to be moved, which can weigh on margins, or on some occasions is destroyed entirely.
In Aurora's case, the company has faced supply bottlenecks in select Canadian provinces (ahem, Ontario) where an insufficient number of retail locations are open to sell adult-use marijuana products. As a result, its inventory levels have continued to climb. Thus, a stable or falling inventory figure would signal to investors that Aurora is finding new channels to sell its cannabis products.
3. International sales
A third figure of great importance is the company's international sales.
No Canadian marijuana stock has a broader global reach than Aurora Cannabis -- albeit this international presence hasn't provided much in the way of recurring sales, as of yet. Including production, export potential, and research opportunities, Aurora has a presence in two dozen countries outside of Canada.
Most recently, Aurora acquired cannabidiol (CBD)-focused company Reliva in the United States in an all-stock deal. Though CBD has been a bit of a disappointment in the U.S., the move allows Aurora to get its feet on U.S. soil should the federal government ever decide to legalize marijuana.
The point is, international sales should play a very big long-term role for Aurora Cannabis, and this is the specific revenue figure that investors should be paying their closest attention to.
4. Adjusted EBITDA
Current and prospective Aurora Cannabis investors shouldn't turn a blind eye to the company's bottom line, but there's a far more important metric for at least the next two quarters: adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
As some of you might recall, Aurora announced a massive corporate overhaul in February. The company's longtime CEO Terry Booth told the world he would be stepping down and retiring, while the company outlined plans to reduce its selling, general and administrative expenses from around $100 million Canadian a quarter to a range of CA$40 million to CA$45 million per quarter. This included letting more than 10% of its workforce go, although additional layoffs have been announced since February.
Most importantly, the company's corporate strategy shift involved reworking its debt covenant. The new covenant requires Aurora Cannabis to generate positive adjusted EBITDA by no later than the first fiscal quarter of 2021 (ended Sept. 30). If the company were to default, its lenders may swoop in to collect on what's owed -- and let's just say that Aurora isn't exactly known for being cash-rich.
No number is more important right now for Aurora than its adjusted EBITDA.
5. Cash on hand
Logically, the next number you're going to want to know is Aurora's cash on hand (this includes cash equivalents and any marketable securities, as well).
Even though Aurora ended March with CA$230.2 million in cash, which certainly sounds like a hearty buffer, it masks the fact that the company burned through more than CA$427 million in cash between Oct. 1, 2019 and March 31, 2020. This unsustainable cash burn is a big reason behind the company's aforementioned overhaul that was announced in February.
The issue for Aurora is that it has few nondilutive avenues to raise capital. It already has an outstanding loan, and its operating performance hasn't exactly stoked confidence in other banks to lend the company money. Instead, Aurora Cannabis has had little choice but to continually issue its own stock to raise capital.
In April, Aurora's board approved a $350 million (that's U.S.) at-the-market stock offering. Essentially, this allows the company to sell shares of its common stock to raise capital as it sees fit over the next, roughly, two years. This will allow Aurora to raise up to $350 million, but it'll also see existing shareholders diluted in the process.
Pay very close attention to Aurora's cash on hand and burn rate, as it'll ultimately dictate how much share-based dilution shareholders will contend with.
Lastly, current and prospective investors will want to keep a close eye on Aurora's balance sheet. More specifically, the company's goodwill, which stood at CA$2.42 billion in the most recent quarter.
Goodwill is the premium an acquiring company pays above and beyond tangible and intangible assets. The expectation for a purchasing company is that it'll be able to recoup this premium over time, thereby whittling away any goodwill that's been recognized on its balance sheet.
But there's another way to look at goodwill: the gross overpayment for an asset. In Aurora's case, it grossly overpaid for licensed producer MedReleaf in July 2018. The all-share deal came with a price tag of CA$2.64 billion. But Aurora has since sold off the Exeter facility and shut down MedReleaf's smaller grow farm. Essentially, it paid CA$2.64 billion for a 28,000 kilos of annual output and a handful of proprietary brands.
It's my belief that Aurora Cannabis has some big writedowns in its future, and they likely begin with the company's CA$2.42 billion in goodwill.