Aurora Cannabis (ACB 18.15%) has long been an underperforming marijuana stock. And year to date, it's off to another rocky start, down 15% in 2021 while the Horizons Marijuana Life Sciences ETF has risen 18%. But there is hope that the company could become more investable as it has been shedding costs and improving its bottom line.
There's definitely risk involved here, but investors have seen just how quickly the stock can rise on some bullishness; shares of Aurora skyrocketed to highs of nearly $19 in February amid the meme hype. Should contrarian investors consider picking up the stock before the company announces its year-end results in September?
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Aurora has been making progress on multiple fronts
Although Aurora has struggled with generating consistent revenue growth and staying out of the red, that doesn't mean the business hasn't been making progress. If nothing else, it looks a lot more stable nowadays. The company reported cash on hand on May 12 of 525 million Canadian dollars, compared with just CA$230 million a year earlier. That's a solid improvement, especially because in early 2020, many investors were concerned that Aurora could run out of money within just a few months.
The company is in a much better place now, and its operations are much more sustainable. Over the trailing 12 months, Aurora has burned through CA$280 million. If it maintained that rate, its cash balance could potentially fund its operations for nearly two years (assuming its needs for capital and investments were minimal). That's an important consideration for investors in a company that has normally been quick to raise money through stock issues. While having a significant chunk of cash on hand doesn't guarantee that it won't pursue further offerings in the near future, it could minimize the need to do so.
Aurora has also been making strides in improving its bottom line. For the third quarter ending March 31, the company reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of CA$24 million. That's less than half the CA$50 million loss it incurred a year earlier. And the company said it found another CA$60 million to CA$80 million in annual costs that it can trim within 18 months.
Revenue might be the biggest problem
Improvements in EBITDA and cash flow would be great for investors to see. However, if the company can't achieve that while growing its top line, it may not be enough for the stock to rally. There are many great cannabis stocks out there that are achieving incredible sales numbers, and if Aurora wants to attract growth investors, it's going to need a much stronger top line.
In Q3, sales of CA$55 million were down 21% year over year. The company did particularly badly in the consumer segment, where cannabis net revenue was just CA$18 million -- less than half of what the company generated a year earlier. Aurora blamed the poor results primarily on COVID-19 and the impact of lockdowns on distributors and retailers. Ontario, Canada's largest province, only began loosening its COVID-19 restrictions in June, so investors may need to wait a couple of quarters before consumer numbers improve.
A wait-and-see approach remains safest for this stock
It's easy to be negative on a stock that has lost close to 90% of its value since 2019 (the Marijuana Life Sciences ETF, by comparison, is down 35% during that time frame), but there are reasons for investors to have some optimism around Aurora. And from the surge in the stock's value back in February, you can see that investors are eager to believe that the business is on the right track.
That said, it isn't quite there yet, and there could still be a long road ahead. Aurora needs to get to profitability, and its sales numbers need to get a lot better. With lockdowns still likely impacting its upcoming quarterly results (at least on the consumer side), I wouldn't expect a strong rebound this coming quarter. But given that the Canadian pot market reached an all-time high in May with CA$313 million in sales, Aurora's fourth-quarter numbers could still look better than Q3's.
At a minimum, I would wait for at least a couple of quarters' worth of positive adjusted EBITDA and strong sales growth before even considering buying this pot stock. Waiting for the company to deliver consistent results might sacrifice some potential gains along the way, but it will also prevent you from incurring significant losses by gambling on what's proven to have been an extremely risky stock over the past few years.
