Cannabis producer Aurora Cannabis (ACB 2.76%) reported its fourth-quarter results in September. While the numbers weren't all that surprising -- sales were lackluster and the business remains unprofitable -- the one thing that stood out was the company's claim that it is again on track to post a profit.
Investors have heard that claim before, only for the company to end up falling short and scaling back expectations. Should investors believe the company this time around?
Adjusted EBITDA showed improvement in Q4
When cannabis companies talk about profitability, they're usually referring to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). It's what left after the company makes adjustments to EBITDA for noncash expenses or integration-related costs that are nonrecurring. It's discretionary, and it's also not a standard line item (as per generally accepted accounting standards), so there's room for subjectivity.
And it's on this adjusted EBITDA number that Aurora says it will eventually become profitable. In Q4 (period ending June 30), its adjusted EBITDA loss was 19.3 million Canadian dollars -- an improvement from the CA$33.3 million loss it reported a year ago. This was due in large part to the significant cost-cutting the company has been doing over the past year, which includes laying off workers and scaling back its operations.
The reason the company is optimistic about hitting adjusted EBITDA profitability is that Aurora says it is "on track" to reach annual cost savings from CA$60 million to CA$80 million -- half of which it expects to realize in fiscal 2022.
Aurora Cannabis has been "on track" before
The problem with putting too much stock into Aurora's projections or targets is that investors have been here before; continually disappointing numbers are a key reason why its shares are down a whopping 94% over the past three years (the Horizons Marijuana Life Sciences ETF has crashed as well, but at 68%, it losses are not quite as deep).
The most comical example of Aurora's failures came in September 2019, when the company posted quarterly revenue of CA$98.9 million (for the period ending June 30, 2019). Although that was a 52% rate of growth from the previous year, Aurora missed its own projections that it made for revenue just a month earlier. In August 2019, it provided an update and guidance that its top line would be between CA$100 million and CA$107 million for the quarter. During the same update, Aurora said it "continues to track toward positive adjusted EBITDA."
Two years later, the company is still working to get to adjusted EBITDA profitability. Last year, when it released its year-end results for fiscal 2020, the company projected that it would be profitable by the second quarter of fiscal 2021. In fairness to new CEO Miguel Martin, he only took on the leadership role a year ago.
The company likely will post a profit. But is it too little, too late?
On the company's Q4 earnings call, Martin stated that he expects to hit adjusted EBITDA profitability in the first half of fiscal 2022. He claims that even without revenue growth (sales in Q4 were nearly identical to the prior period's top line), the company could still hit adjusted EBITDA profitability this year.
Aurora is close enough to adjusted EBITDA profitability that it does look inevitable that it'll happen -- it's more of a question of when. But at this point, I'd argue that it doesn't even matter. Even cannabis meme stock Sundial Growers already achieved that. And many multi-state operators do it with ease every quarter. Meanwhile, there's danger that Aurora could fall behind in revenue to Village Farms International, a cannabis and produce business that's ramping up its marijuana production and that's already consistently profitable.
Although Aurora has shown progress with respect to adjusted EBITDA, it will need to do a whole lot more to prove to investors it's a good company to invest in, as many of its rivals are passing it by in market share and there are much better buys out there.