Some investors still believe that Canada-based Aurora Cannabis (ACB -0.15%) can make a comeback. Its cost-cutting efforts under a new CEO, Miguel Martin, who took the reins in September, haven't gone unnoticed. The hope is that these measures, along with a pandemic-induced boom in cannabis demand, could help Aurora achieve profitability soon. But there are other challenges involved, such as handling expenses, procuring capital, and launching new products to drive revenue growth.
Aurora performed dreadfully throughout the calendar year 2020. But its results in its recent fiscal 2021 second quarter, which ended Dec. 31, appeared to improve a little. Has that put Aurora back in safe waters? The company has made investors millionaires in the past, but does it still have the potential to do that again? Let's take a look at its progress so far this year, and determine if that is possible.
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Revenue growth was good in Q2, but was it enough?
Total revenue in the second quarter increased 23% year over year to 67.6 million Canadian dollars. Total medical cannabis net revenue surged 42% to CA$39 million. Most encouragingly, a 562% year-over-year increase in international medical cannabis sales proved demand for Aurora's products worldwide. Canadian medical revenue also jumped, but only by 6% to CA$27 million.
However, on the recreational front, total consumer cannabis revenue increased just 25% to CA$28.5 million. Sales of the still limited selection of derivatives products (vapes, edibles, and concentrates), which Aurora launched in December 2019, increased by CA$1.7 million sequentially. If Aurora wants to grow its revenue at a high rate, it has to focus more on derivatives -- high-margin products that offer a good opportunity for Aurora to achieve profitability. That said, to launch new products, capital is required -- something the company is short of.
Aurora's earnings before interest, tax, depreciation, and amortization (EBITDA) loss decreased drastically in the second quarter, to CA$16.8 million from CA$69.8 million. The credit goes to its "business transformation plan," which helped cut down its selling, general, and administrative (SG&A) expenses by 53% to CA$44.4 million from the year-ago period.
Still, a shrinking EBITDA loss isn't a green light for an investment. Aurora has been failing to deliver on its promise of profitability for a while now. Last year, management said they planned to achieve positive EBITDA by its fiscal 2020 fourth quarter, which ended in June. But that didn't happen. Management again promised the company would achieve that goal by Dec. 31, but that didn't happen either.
In fact, way back in May 2019, management was making assurances that the company would achieve positive EBITDA by the fourth quarter of fiscal 2019. It didn't, and its losses just kept mounting after that. Aurora seems to have developed a disturbing pattern here of promising and not delivering. All this makes it hard to have faith in this pot company.
Still a long way to go for Aurora
There is still a rocky path ahead for this company to turn into a true growth stock. Given that U.S. cannabis companies are rapidly expanding with the prospect of federal legalization on the horizon, Aurora is not in a position to thrive among the competition. A strong partnership would have helped -- for instance, in the way that U.S. beverage giant Constellation Brands (STZ -0.64%) is doing some heavy financial lifting for its partner, Canopy Growth (CGC 2.41%).
Lacking a strong partnership and the necessary financial resources, it will be close to impossible for Aurora to expand in the U.S. market. Aurora stated in a press release that at the end of Q2, its year-over-year cash use declined by 74% to $70.5 million, and it now has $565 million cash on hand. I wouldn't get too excited about that increase. It also has CA$493.3 million in total debt.
Also, most of the financing Aurora has raised is from diluting its stock, which doesn't sit well with investors. It usually means the business couldn't raise capital through any other means. The dilution started in May 2020 when Aurora consolidated its shares into a 1-for-12 reverse stock split. Its stock price stayed below $1 for long enough to put it at risk for being delisted from the New York Stock Exchange.
When Aurora went public in July 2017, its shares outstanding were 30.5 million. As of January, it had close to 165 million shares outstanding. On Nov. 16, Aurora closed a $150 million public offering that offered 20 million of its shares priced at $7.50. On Jan. 21, Aurora announced another $125 million bought-deal financing at $10.45 a share.
Not a millionaire-maker now, or anytime soon
At this point, it looks impossible for Aurora to become a millionaire-maker anytime soon. It could take a couple of years before the company starts turning a profit. Industry optimism drove the stock sky-high earlier this year, but so far Aurora has returned just 10% overall in 2021, whereas the industry benchmark Horizons Marijuana Life Sciences ETF has seen a dramatic gain of 57%.
ACB Total Return Level data by YCharts
If you still have faith in Aurora and can stomach the risk, it may not hurt to initiate a small stake. But going big with this pot stock and hoping it turns into millions probably isn't a wise decision at this stage in its story.
