Canadian marijuana company Aurora Cannabis (ACB -2.96%) is one of the most productive competitors in the North American cannabis marketplace, cultivating more than 35,000 kilograms of bulk flower in the third quarter of this year. With its net revenue expanding at a compound annual growth rate of 144% between the start of 2017 and the end of 2019, it's easy to see why some investors are taking an interest in the company. But it faces serious obstacles to its future success, and it hasn't had an easy year.
Aurora is nowhere close to being a profitable company, and to make matters worse, its stock has taken a beating this year, contracting by more than 82%. Can Aurora rally its fortunes and return its share price to the wild highs of 2018 and 2019, or are the company's millionaire-maker days firmly in its past? In my view, this company probably doesn't have what it takes to make you rich anytime soon, but it might be a decent investment anyway if it can tackle some of its problems, so it's still worth evaluating in depth.
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Consumer cannabis is a problematic market for Aurora
Aurora's largest obstacle to profitability -- and the prospect of making investors rich -- is its inability to grow its revenues, which most recently shrank by 5% on a quarterly basis. In fact, Aurora's recreational cannabis revenue dropped by 9% compared with last quarter, reaching $35.3 million Canadian dollars in total. This is a major problem for the company, especially considering that it sold 36% more dried cannabis by volume in the same period.
Unfortunately, the reason Aurora was able to sell significantly more of its products by volume while still reporting declining revenues is that in general, it was selling lower-value products (think highly discounted bulk cannabis flower, for which the company has narrow margins). In contrast, products with a high degree of added value (think vaporizers) exhibited decreasing sales revenues and declining market share.
Aurora's other issue is that its overhead costs are extremely high, leading the company to announce the planned closure of several of its production facilities earlier this year. Job cuts are also in progress, with production staff being reduced by as much as 30% and administrative staff by about 25%. These cuts are unlikely to be the last, especially if management is keen on its plan to reach positive earnings by the first half of 2021.
Shareholders should be pleased that the company is taking aggressive action to move toward profitability. But it's important to remember that millionaire-maker companies are typically expanding their ranks precipitously to meet hot demand in their markets, rather than sharply shrinking to downscale production capacity to what their market will support.
How Aurora might make a turnaround in 2021
There are a few things that indicate Aurora is on the right track to becoming a stock worth buying. First, the company is increasing its gross margin by shifting its emphasis to high-margin medicinal cannabis products, rather than its low-margin consumer cannabis fare. It's also working to drop its production costs for each gram of dried cannabis; those costs fell by 27% last quarter. Finally, Aurora's leadership has changed, with the longtime president, the CEO, and a high-profile advisor all departing earlier this year. The company's new management team will likely be instrumental in changing its trajectory, but they still have some work to do before shareholders consider them a proven quantity.
Aurora can't be considered a millionaire-maker stock at present. Between its over-capacity production facilities and its inability to compete effectively in high-margin markets, there's no path for its stock to grow by a massive amount. If management can successfully pivot its business to medicinal markets and more value-added cannabis goods, it may be able to start bringing in more money than it spends. Once its profitability has been established, it'll be worth revisiting the question of whether it might make investors rich.
In the meantime, check back in a year to see how Aurora is progressing along its transformation plan while under its new leadership. If the company's present problems seem like they've been tackled, its stock might have a brighter future than it does right now.
