After Canada legalized recreational cannabis in October 2018, the rate at which Canadian marijuana company Aurora Cannabis (ACB 2.65%) expanded its operations convinced many investors that it would lead the new industry. However, when Canadian demand couldn't match Aurora's supply, the business's aggressive game plan proved detrimental. Regulatory hurdles also caused a delay in the opening of legal stores, affecting revenue, and Aurora's losses kept mounting.
However, the company is going all in this year to recover and reestablish its top spot in the cannabis market. It executed some stringent cost-cutting measures in June that it calls "facility rationalization plans," shutting down unproductive facilities and focusing on the productive ones. But its efforts do not yet appear to be bearing fruit, and investors who were hoping for glimmers of hope from Aurora's Q1 2021 results (released Nov. 9 for the period ending Sept. 30) were disappointed. Does this cannabis company have a chance to recover anytime soon and turn its investors into millionaires?
First-quarter results didn't paint a good picture -- now what?
Aurora's total cannabis net revenue sank 8% year over year to 67.8 million Canadian dollars in the third quarter of 2020. The decline was caused by Aurora's Daily Special value brand, which was faced with some increased competition from peers in the cannabis flower category, according to management.
The fall in revenue was accompanied by another earnings before income, taxation, depreciation, and amortization (EBITDA) loss this quarter. That loss came in at CA$57.8 million, compared with a loss of CA$33 million in the year-ago quarter. Sequentially, losses were also worse than the CA$32.2 million seen in the fourth quarter of 2020. This was due to legal-settlement and contract-termination fees associated with workforce reduction as part of the company's business transformation plan.
The company needs to grow revenues at a faster pace and establish its position in the consumer cannabis market to achieve profitability. Its facility rationalization plans challenged its sales growth, but the company is ready with new tactics. In the management discussion and analysis for Q1, management targeted four things:
- Growing Aurora's market share in key profitable Canadian consumer categories.
- Enhancing and strengthening the company's Canadian medical market share.
- Growing the international medical business, especially in the European market.
- Building Reliva's brands in the U.S. cannabidiol (CBD) market.
Aurora acquired Reliva, which produces non-intoxicating products made from CBD, in May in exchange for $40 million of its common stock. Management intends to use Reliva's wide network of 20,000 retail stores to help capture the U.S. CBD market.
All of these strategies sound promising, no doubt, but these changes could take a while and will demand additional capital. Aurora has allocated capital of CA$40 million for all spending in fiscal year 2021. I will be surprised if -- with no profits -- Aurora can manage to fulfill its strategies within the CA$40 million it has set aside. Aurora already spent CA$13.2 million of that allocation in Q1. The company faces challenges in part because of its lack of a strong financial backer. For example, Constellation Brands (STZ -1.37%), which invested in Canopy Growth (CGC 5.72%) in October 2017 and has been increasing its stake ever since. Constellation's funding -- it now holds 38.6% of the company -- is propelling Canopy's growth strategies.
So could Aurora make you a millionaire?
The short answer: Aurora has a long way to go before it can be a millionaire-maker stock. For now, the company will have to work hard just to stay in the game. The company's 1-for-12 reverse stock split in May was intended to help boost its stock-price performance, but that level of stock dilution didn't sit well with investors.
Diluting stock can help a company grow its earnings, but that's not the case either for Aurora. Its stock-price performance so far this year is worse than last year's slump of 56%. In 2020, year to date, Aurora's stock is down about 60%. Meanwhile, the industry benchmark, the Horizons Marijuana Life Sciences ETF, is basically flat, down 0.3%. And Canopy Growth, sporting second-quarter fiscal 2021 results that were better than Aurora's, has seen its stock jump 34% over the same period.
Currently, management claims it will attain positive EBITDA by the end of the second quarter. That's coming right up on Dec. 31, and looking at the first-quarter results, it's hard to trust the company can hit its target. If you feel a sense of déjà vu here, you're not alone -- Aurora made similar failed promises to achieve positive EBITDA by the fourth quarter of fiscal 2019 in May of last year. With its current scenario of revenue decline, unprofitability, and operating expenses improving at a slow rate, there are few chances for the company to achieve positive EBITDA anytime soon.
Until Aurora can show investors that it can live up to its promises, work on its growth strategies, find alternative ways of raising capital, and grow revenue at a faster rate, I think that it is not only far from a millionaire-maker -- it is a marijuana stock to avoid.