Aurora Cannabis (ACB -2.42%), once a favorite among pot investors because of its bold expansion strategy, lost steam in 2019. Aurora's shares declined 56% last year, compared to a 36% decline of the industry benchmark, the Horizons Marijuana Life Sciences Index ETF. Various external headwinds in Canada affected revenue, and some of management's rash decisions -- including an acquisition spending spree -- made it impossible for the company to achieve profitability.
Marijuana sales have been rising in 2020, particularly because of the coronavirus pandemic, which has amplified consumer demand. Aurora is seeing revenue growth this year, but it hasn't been enough to turn into a profit. The company has made strides to reduce expenses in order to achieve positive EBITDA (earnings before income, tax, depreciation, and amortization) by fiscal year 2021. But to what extent those strategies have played out will be clear when it announces its fourth-quarter results on Sept. 22. Before you decide whether to buy this pot stock, watch out for these three updates in its reports.
1. Cost-reduction efforts
To regain investors' confidence, Aurora presented business transformation plans in June called "facility rationalizations" that were intended to help reduce costs. The company had decided to close five of its small-scale facilities over the next two quarters and consolidate a few of its Canadian production and manufacturing units. Meanwhile, it planned to ramp up production at its Nordic facility in Europe.
In its recent business update, dated Sept. 8, the company finally addressed the issues in its balance sheet. The press release stated a list of impairment charges the company expects in the fourth quarter. They are:
- Fixed asset impairment charges up to 90 million Canadian dollars associated with its facility rationalization
- An approximate charge of $140 million linked to the carrying value of certain inventory
- A non-cash writedown of goodwill and intangible assets (the company did not specify the details of the charges) that could come in between $1.6 to $1.8 billion
Aurora has also improved its financial flexibility through credit facility amendments and stated that it expects cost reductions of up to CA$10 million per quarter starting in the second half of fiscal 2021.
2. Update on cannabis derivatives products
Canada made cannabis derivatives products legal in October 2019 as part of "cannabis 2.0 " legalization, an extension of the recreational adult-use legalization that happened in October 2018. Derivative products include edibles, vapes, chocolates, concentrates, beverages, and more.
Aurora announced its variety of derivatives products in December 2019, including CBD (cannabidiol) and THC (tetrahydrocannabinol) vapes, concentrates, and edibles (gummies, chocolates, baked goods, and mints). But since then, the company hasn't given updates on any new products. It hasn't shown much interest in cannabis beverages, either, a decision that may not prove wise.
Peer Canopy Growth (CGC -4.82%) has been very busy launching its new cannabis derivatives products, which include beverages. It released these and a variety of cannabis-infused chocolates and vape products in May. Canopy is already enjoying good sales and positive feedback for its beverage offerings. It has shipped close to $1.2 million cans to the Canadian province since the launch. The U.S cannabis beverages market alone could be worth $2.8 billion by 2025, according to Grand View Research.
The entire cannabis derivatives market could be worth CA$2.7 billion annually, with cannabis-infused beverages alone generating close to CA$529 million, according to Deloitte research.
If the estimates for beverages prove right, Aurora could lose out while peers enjoy the revenue gains from these new products.
3. Growth strategy
Aurora has focused on growing its markets internationally, targeting a few countries where cannabis hasn't obtained its full market potential. Its business is spread over 25 countries across five continents, which now seems like a bold and hasty decision. Perhaps Aurora's focus should have been to solidify its position in its home country before turning to opportunities abroad. Look at how Aphria (APHA) CEO Irwin Simon's strategy of focusing core operations in Canada has worked out for business. Aphria is the only profitable cannabis company with five consecutive quarters of positive EBITDA.
Aurora could also use some help from closer-to-home U.S. markets. U.S. cannabis companies have seen some impressive revenue growth this year even with a limited (and legally confusing) marijuana market. Although cannabis is still an illegal drug under federal law, 33 states and the District of Colombia have made medical cannabis legal, while recreational cannabis is allowed in 11 states and D.C.
Aurora's baby steps in this direction include its acquisition of hemp-derived CBD company Reliva, for $40 million of its common stock. The buy could absolutely help Aurora make a mark in the U.S. Reliva boasts around 20,000 retail stores and has successfully produced positive EBITDA over the past 12 months, for the period ended March 31.
Adding to Aurora's competitive advantage is the hiring of Miguel Martin as CEO, which the company announced in its recent business update. Martin served as CEO of Reliva before moving over to serve as Aurora's chief commercial officer this July.
Keep an eye on its efforts to recover
Investors should pay attention to what Aurora's management chooses to focus on in the fourth-quarter earnings call, especially regarding the three points stated above. Shares of Aurora have fallen the furthest in the industry, almost 75% so far this year, compared to Canopy and Aphria's respective declines of 22% and 10%. The Horizons Marijuana Life Sciences Index ETF has fallen 8.6% over the same period.
But not all hope is lost for Aurora. It can still turn things around if it religiously follows its cost strategies and continues to reduce expenses. The Canadian market is slowly advancing, after being held up with regulatory delays and oversupply, just a few reasons for the drop in sales last year. Ontario authorized its 100th retail store in June.
A few more U.S. states have marijuana legalization on the ballot this year, which could spell more opportunities for Aurora. The company also can use its new CEO's expertise in consumer goods and cannabis sectors to its advantage.
The only tweak in Aurora's recent update was the company postponing achieving positive EBITDA again to the second quarter of fiscal 2021. Aurora has time and again missed its deadlines and targets, which has made investors skeptical. Unless the company provides firm assurance and evidence on Sept. 22, this marijuana stock is one to avoid.