Aurora Cannabis (ACB -1.04%) is once again sizzling-hot. The Canadian pot stock skyrocketed last week as investors celebrated the U.S. election results. Aurora's off to a great start this week after reporting its fiscal year 2021 first-quarter results.
Many investors are excited that Aurora beat revenue estimates in the first quarter. However, there are three reasons why the company's Q1 results were worse than you might think based on the market's immediate reaction.
1. Only a minuscule revenue increase
Aurora posted total net revenue in the first quarter of 67.8 million in Canadian dollars. This was higher than the company's previous forecast of revenue between CA$60 million and CA$64 million. However, it's important to note that this was only a minuscule increase of 0.4% from the previous quarter.
Also, Aurora's Q1 revenue total came in nearly 10% below the company's revenue generated in the prior-year period. Sure, the company divested some of its noncore businesses over the last 12 months. However, Aurora's cannabis net revenue still slipped 4% year over year. The company might have beat expectations in Q1, but those expectations were lower than they've been in the past.
It would be one thing if Aurora's top rivals were experiencing the same malaise, but they're not. Canopy Growth (CGC -0.01%), for example, reported its latest quarterly results Monday morning as well. Aurora barely squeaked out a quarter-over-quarter increase, but Canopy's revenue jumped 23% from the previous quarter to CA$135.3 million -- a record high for the company.
2. Losing ground in the Canadian recreational market
The most important market for Aurora Cannabis right now is the Canadian recreational marijuana market. It accounts for roughly half of the company's total revenue.
Unfortunately for Aurora, it's losing ground in this key market. The company announced Q1 consumer cannabis net revenue (most of which is generated in Canada) totaling CA$34.3 million. This amount was 3% below Aurora's Canadian recreational marijuana net sales in the previous quarter.
It could have been even worse. Aurora said that its consumer cannabis revenue in the first quarter was bolstered by CA$1.1 million in U.S. CBD sales, made possible by its acquisition earlier this year of Reliva. Meanwhile, Canopy Growth heralded its increasing market share in the Canadian recreational market.
3. Yet another big loss
We certainly can't overlook the fact that Aurora yet again posted a big loss in the first quarter. The company recorded a net loss from continuing operations of CA$107.2 million. However, it focused more on the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss in Q1 of CA$57.9 million -- worse than the adjusted EBITDA loss of CA$29.6 million in the previous quarter.
Granted, Aurora's adjusted EBITDA deteriorated because of a legal settlement, contract termination fees, and costs related to ongoing severance and benefits associated with its downsizing. Without these expenses, the company's adjusted EBITDA loss would have been CA$10.5 million.
Still, Aurora's path to achieving positive adjusted EBITDA and positive cash flow depends on slashing costs more than it does top-line growth. That's not ideal.
What really matters now
Aurora still thinks it will generate positive adjusted EBITDA in the second quarter of fiscal 2021. The credibility of the company's management team rides on Aurora hitting that goal. Even more importantly, Aurora expects to deliver positive cash flow in fiscal 2021. This is critical for the company to avoid having to issue more shares to raise cash, thereby diluting the value of existing shares.
While these objectives are within Aurora's control, there's another major story for the marijuana stock that isn't. Aurora desperately wants to expand into the U.S. cannabis market. It can't do so and retain its listing on a major U.S. stock exchange until federal marijuana laws are changed. The best chance at this happening would be with a Democratic majority in both houses of the U.S. Congress and a Democrat in the White House.
Two of these three conditions should now be met, with the Democrats holding onto control of the U.S. House of Representatives and Joe Biden the projected winner in the presidential race. However, the fate of the Senate hinges on two runoff elections in Georgia.