Timing is of the essence when it comes to investing in shares of Aurora Cannabis (ACB +2.76%). If you had bought the stock a year ago, that investment would have led to a 63% loss. However, if you'd opened a position before five new state-level legalizations during the 2020 elections, your principal could be up nearly 90%.
At first glance, Aurora does not appear to be the type of cannabis company that is on the road to recovery. Over the past year, Aurora had to sell more of its stock to stay afloat. The result was a stunning 89% increase in shares outstanding to 183.7 million. Despite all this, I think the company may finally reverse its fortunes this year.
Image source: Getty Images.
A downsizing streak
During its 2020 fiscal year (ended June 30), Aurora's core business took a devastating blow, registering 3.3 billion Canadian dollars in net losses. During the span of 2017 to 2019, the company invested billions of dollars in state-of-the-art facilities to become the pot producer with the largest production volume in Canada.
The only problem? There was never that much consumer demand in the first place, largely due to the black market being more resilient than legal sellers first anticipated. Last year, Aurora projected that it would be able to cultivate over 500,000 kg of dried cannabis by mid-2020 and post a lucrative profit. In reality, the company only ended up selling about 16,000 kilograms of dried cannabis per quarter.
Facing steep operating losses, Aurora had to cut back its newly built cultivation sites, resulting in hefty writedowns and impairments. The troubled pot grower also paid substantial premiums for competitors that did not perform as expected. In early 2018, it paid CA$3.2 billion to acquire MedReleaf, a company that brought in only CA$43.6 million in sales per year.
Last February, Aurora laid off over 500 employees to restructure its spending. In June, it ended up cutting its sales, general, and administrative (SG&A) staff by 25% and its production staff by 30% while closing down five production sites. On Nov. 30, the company announced it was letting go an additional 30 workers and shutting its Aurora Sun greenhouse. Aurora previously designed the site to grow over 230,000 kg of cannabis per year.
That's not all; the company laid off another 200 employees on Dec. 16 and reduced production capacity at its Aurora Sky facility by 75% to 25,000 kg per year. Overall, 2020 has been anything but good for Aurora's bottom line and far worse for investors. Nevertheless, the major downsizing efforts are paying off -- and should give investors some optimism.
Light at the end of the tunnel
But after all this, now may actually be the best time for investors to start a position in Aurora. After all the aggressive cost-cutting initiatives, the company has scaled down its cultivation to about 67,500 kg per year, which is much more in-line with market demand.
During the first fiscal quarter of year 2021 (ended Sept. 30), Aurora managed to bring down its operating losses to CA$42.3 million from CA$77.8 million a year ago. The company's capital expenditures fell dramatically during the same period, from CA$106.8 million to CA$15.8 million.
Aurora's revenue has been mostly underperforming as the average selling price of cannabis has declined to CA$4.58 per gram from CA$5.68 per gram. There is no doubt that the Canadian market is becoming more and more saturated, and as a result, more competitive. Aurora's revenue decreased by 8% year over year to CA$67.8 million in Q1 2021.
The company, however, has another shot at a return to growth with its new U.S. expansion plan. Back in May 2020, Aurora acquired cannabidiol (CBD) company Reliva LLC for $40 million. Reliva's CBD brands are among the top two in the U.S. (the other belongs to Charlotte's Web) and brings in approximately $10 million per year in revenue. Due to widespread support for the decriminalization or full legalization of cannabis on the federal level, the U.S. CBD market may scale to $12.3 billion in 2022, from about $5.1 billion in 2019.
Why now is the time to buy
Aurora currently has CA$450 million cash on hand, which is about equal to its debt obligations. Besides that, the stock is only trading for about 4.3 times revenue and 0.9 times net assets. As long as the company continues to balance its Canadian business and focuses on pushing market share in the U.S., I think it is only a matter of time before it returns to growth. If you have waited to buy Aurora Cannabis stock on the dip, make it part of your portfolio in 2021.
