Would you want to invest in a stock that lost more than 80% of its value over the last three years? Probably not, but you might be willing to hedge your bets if it started to make a turnaround.

As you might have guessed, the stock I'm referring to is Aurora Cannabis (NASDAQ:ACB). While its turnaround is anything but guaranteed, it has new management, a plan to transform its business, and -- as a green wave slowly sweeps the U.S. -- new markets to enter. One year from now, the company might be on the road to healthy finances and profitable growth. There's just one problem: I could have said the exact same thing last year or the year before, and I would have been wrong.

A greenhouse full of cannabis plants.

Image source: Getty Images.

Cutting costs has yet to provide transformative change

Aurora Cannabis has two things in its favor: Revenue leadership in the Canadian medicinal cannabis market, and rapid growth in its international medicinal segments. Its gross margin for medicinal sales was 59% in its first quarter of the 2021 fiscal year, which is significantly higher than the 38% margin of its recreational cannabis sales. If it can continue to maintain its advantages in the medicinal market, there won't be as much pressure on its bottom line. But there are signs of trouble. Its medicinal margin dropped by 8% while the recreational margin increased by 3% in the most recent quarter.

It's no secret that the company is working hard to turn the corner. Cost-cutting is proceeding aggressively, building on prior efforts to shut down or sell excessive and expensive cultivation facilities. Selling, general, and administrative (SG&A) expenses dropped by 25% last quarter, and research and development (R&D) expenses plummeted by 66%. Look for these improvements to continue over the next year, albeit at a slower pace as the easy cuts conclude.

Profitable operations will probably be an ongoing struggle for Aurora Cannabis in 2021. Last quarter, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved 64% to reach a loss of $10.5 million. That's assuming you exclude the costs of implementing its business transformation plan and paying out one-off expenses like severance, however. Without these concessions, the company lost $57.9 million, a deterioration of 79% more than the prior quarter and also significantly worse than the losses of $29.6 million in the quarter before last. It's hard to argue that profitability is right around the corner when losses seem to keep growing larger and larger if you don't use accounting loopholes.

Will progress gain momentum, or sputter out?

It looks like trimming costs isn't going to be enough to make Aurora profitable by next year. Thankfully, it's also transitioning its recreational cannabis strategy to prioritize "Cannabis 2.0" products like vaporizers over low-margin cannabis flowers. These items command higher selling prices and also higher margins, so they'll help a great deal with overall profitability. Last quarter, the Cannabis 2.0 segment grew by 31%, paired with a 4% increase in the average net selling price per gram of cannabis. If management can keep up this growth, it'll be in significantly better shape by the end of 2021.

Of course, competitors like Canopy Growth Company and Aphria will be contesting this attempt to gain Cannabis 2.0 market share. In particular, Canopy's strategy has been to capture the cannabis beverage market, where it retains a 54% share in Canada; Aphria has also entered the beverage market with cannabis-themed beers. This is important, as Aurora blamed competition for its 3% decrease in consumer cannabis revenue last quarter. It's unclear exactly how or in which product segment it plans to beat the competition in the recreational market, so investors should be on the lookout for any clues from management. If in 2021 its difficulties in the consumer segment continue or worsen, the company's future will be in even more severe jeopardy.

On the other hand, if Aurora's plan to switch to higher-margin recreational use products succeeds and its revenue growth accelerates, it'll be on the road to profitability. If it's fantastically successful, it might even reach its first profitable quarter by the end of 2021. 

But should you invest in Aurora Cannabis? Not yet. Wait until its adjusted earnings losses have shrunk so much that they're on the verge of becoming gains. At that point, which may well be by the end of next year, the company will have established its turnaround firmly. Until then, this stock is a risky gamble.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.