The number of times Canada-based Aurora Cannabis (ACB -2.96%) has failed exceeds the amount of success it had in the past. There was a time when investors believed Aurora would lead the cannabis industry. But those days are long gone. The way this company is performing currently makes it doubtful that it will be back in safe waters any time soon.
Even the pandemic-induced cannabis boom wasn't enough to help Aurora get back on its feet. Its revenue growth remains sluggish, and it is far from achieving profitability. So what is this company doing wrong while its peers and U.S. counterparts are soaring high? Let me tell you the reasons why I am reluctant to own Aurora Cannabis stock.
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Revenue growth is not enough to turn a profit
While U.S. cannabis companies are reporting threefold revenue growth, Aurora's numbers are disappointing. In its fiscal 2021 second quarter (ended Dec. 31), revenue was up just 23% year over year to 67.6 million Canadian dollars.
Regulatory hurdles affected the opening of legal stores in Canada, hampering revenue growth for many companies. But in Aurora's case, its failure to launch innovative products is what stunted its growth. The company won't see a drastic jump until it invests in new, high-margin products -- cannabis derivatives, in particular. Derivatives are additional recreational products that Canada legalized in October 2019. They include vapes, edibles, concentrates, beverages, and more.
Rival Canopy Growth, for example, earned CA$10.5 million in revenue from derivative products alone in its third quarter of fiscal 2021. The company has already captured 34% of the cannabis-infused beverage market share in Canada. Peer HEXO also saw 11% sequential growth in the cannabis-infused beverages segment in its fiscal Q2 2021.
Aurora launched a few derivatives in December 2019, including a range of cannabidiol (or CBD) products, tetrahydrocannabinol (or THC) products, and vape products. It also launched a few edible products, such as gummies, chocolates, baked goods, and mints, but nothing new since then.
The Q2 revenue increase wasn't enough to help it achieve positive earnings before interest, tax, depreciation, and amortization (EBITDA), either. However, losses of CA$16.8 million were an improvement from the CA$69.8 million loss in the year-ago quarter. Management achieved that by cutting costs, which has been its focus all through 2020. Its selling, general, and administrative (SG&A) expenses dipped by 53% to CA$44.4 million from the year-ago period.
No promising growth strategies
Since last year, Aurora's focus has mostly been on reducing costs to achieve positive EBITDA. As a result, it has not been able to focus on the production of any new derivatives. Launching these products is costly. Having failed to raise the necessary amount of capital through other means, Aurora has chosen to dilute its shares. At the end of Q2, it had CA$565 million cash on hand but also CA$493.3 million in total debt.
Meanwhile, peers HEXO and Canopy Growth are ramping up to become market leaders in the cannabis beverage segment. The market for cannabis beverages is expected to generate CA$529 million annually in Canada, according to Deloitte. Meanwhile, the U.S. cannabis beverage market could be worth $2.8 billion by 2025, according to Grand View Research. If Aurora doesn't take any action soon, it may miss out on the early opportunities of this evolving segment. In the U.S., cannabis beverage sales jumped from $67.8 million in 2019 to $95.2 million in 2020.
Aurora also lacks a deep-pocketed partner like its peers, which is worrisome. U.S. beverage maker Constellation Brands (STZ -0.04%) has partnered with Canopy Growth, while tobacco company Altria Group holds a stake in Cronos Group, and HEXO also has a partnership deal with beverage company Molson Coors. A strong partnership could help Aurora survive while strategizing for the company's expansion in the U.S. as well as in international markets.
No fire in this pot stock
Despite the challenges of an evolving industry, most pot companies have a fire in them driving their future growth plans. Aurora lacks this fire, and despite CEO Miguel Martin's consistent efforts to reduce costs, Aurora hasn't seen much good news. Moreover, the company's stock-dilution strategies to raise money aren't sitting well with investors. It is usually seen as a sign that the company is failing to raise capital through any other means.
Aurora doesn't give any solid assurances that it could turn things around for the better, which makes it hard to trust this pot company again. Failure to launch new products, sluggish revenue growth, and lack of progress or wise growth strategies under a new management team make it unlikely I will add Aurora Cannabis to my portfolio. Investors should be wary of this pot stock until it shows more consistent positive numbers.
