Canadian cannabis company Aurora Cannabis (NYSE:ACB) saw a bright future ahead when Canada legalized adult-use recreational marijuana in October 2018. But Aurora's acquisition spending spree, rapid expansion plans, and rising costs -- along with some external factors -- have made it hard for the company to turn a profit.
2019 was a dreadful year for the company, over which the stock lost 56% of its value. In contrast, the industry benchmark, the Horizons Marijuana Life Sciences Index ETF, declined 36% on the year.
2020 hasn't exactly been rosy for the company either. The stock is down over 80% and is consistently underperforming its peers. But Aurora is making some aggressive moves in a bounce-back effort. It executed some cost-cutting strategies including shutting down unprofitable facilities and reducing staff, in order to achieve its goal of hitting positive earnings before income, tax, depreciation, and amortization (EBITDA) by the second quarter of fiscal 2021. With two months left before 2020 ends, chances of the company coming back this year might yet be feasible. If its new strategies pan out, how will next year shape up for Aurora? Let's take a closer look.
Aurora's path to recovery
After a rough 2019, Aurora made some serious attempts to regain investors' trust. In June, it announced business transformation plans that it called "facility rationalization." It decided to shut down five of its small-scale facilities over the next two quarters and merge a few Canadian production and manufacturing units. But now, it plans to ramp up production at its Nordic facility in Europe. The company has had to make up ground after it suffered serious impairment charges in its recent fourth quarter, ended June 30, including:
- A fixed asset impairment charge of 86.5 million Canadian dollars associated with production facility rationalization
- A CA$135.1 million charge 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) of CA$1.6 billion
Are there more cannabis derivatives products in Aurora's pipeline?
The cannabis derivatives market, which Canada legalized in October 2019, is heating up across the border. Derivatives are non-bud recreational marijuana products such as vapes, concentrates, cannabis-infused beverages, and edibles. Aurora launched a long list of derivatives last December: CBD (cannabidiol) and THC (tetrahydrocannabinol) vapes, edibles (chocolates, baked goods, gummies, and mints), and concentrates. But that was the last time investors heard about any Aurora product launch -- until very recently. In its Q4 press release, CEO Miguel Martin discussed how Aurora will focus on emerging-growth formats like vapes, pre-rolls, concentrates, and edibles to position its Canadian consumer business, which "has slipped from its top position in [the] Canadian consumer" market.
Competitor Canopy Growth (NYSE:CGC) capitalized on the derivatives opportunity by launching a variety of derivatives like cannabis-infused chocolates, vape products, and beverages in May. The company sees huge opportunities in the cannabis beverages market and believes that it could attract an entirely new range of customers. Canopy has already shipped $1.2 million ready-to-drink (RTD) cans to Canadian markets under the Tweed, Houseplant and DeepSpace brands.
However, Aurora has shown no interest in cannabis beverages, a strategic choice that doesn't seem all that wise given Canopy's success. The U.S. cannabis beverage market could be worth $2.8 billion by 2025, according to Grand View Research. Other estimates reveal that cannabis beverages could bring in CA$529 million in annual revenue, with all cannabis derivatives generating CA$2.7 billion annually, according to Deloitte.
Given the competition, it would be a smart move on Aurora's part to launch more derivatives products. So far this year, shares of Aurora have crashed an abysmal 83%, worse than Canopy's slump of 15%. The Horizons Marijuana Life Sciences Index ETF has declined 26% over the same period.
What will 2021 bring for Aurora?
How 2021 shapes up for Aurora will depend on to what extent its aggressive cost-cutting strategies have succeeded. Its Q4 results disappointed investors, but hopefully its Q1 2021 report will show evidence that cost-cutting efforts are working. Aurora did already succeed in shrinking its capital expenditures down to CA$16.4 million from a massive Q3 charge of CA$74 million. Aurora's selling, general, and administrative (SG&A) expenses also fell to CA$67.7 million from CA$73 million in the year-ago quarter.
Aurora has just begun addressing investor concerns over a balance sheet full of impairment charges and writedowns, while enhancing its financial flexibility through credit facility amendments. All of these efforts contributed to an improvement in its adjusted EBITDA losses in the quarter. EBITDA losses came in at CA$34.6 million versus Q3's loss of CA$50.4 million.
Management stated in the Q4 results report that its facility rationalizations and cost-reduction plans could shrink costs by up to CA$10 million per quarter starting in the second half of fiscal 2021.
Aurora's bottom line
Aurora's guidance for fiscal 2021 looks bleak. After divesting most of its non-core assets as part of its facility rationalizations plan, Aurora only has shaky cannabis sales to look to for revenue. The company is projecting cannabis net revenues in the range of CA$60 million to CA$64 million in the first quarter, a dip from Q4. Aurora hopes that its gross margin could fall in the range of 46% to 50%, after decreasing total spending on SG&A expenses and research and development (R&D) to a number between $40 and $45 million by the end of FY 2020.
If Aurora continues to reduce expenses and can launch some quality derivatives products, the company could bolster its revenue growth -- allowing it to hit profitability by next year. Investors should keep a close eye on the company's moves going forward. But for now, Aurora is not a reliable buy-and-hold marijuana stock.