Cannabis company Aurora Cannabis (ACB 1.80%) reports its fiscal second-quarter earnings this month. The business has been working on improving its bottom line and while there has been progress in its earnings numbers, Aurora remains unprofitable.
But should investors expect that to change in Q2, and could Aurora deliver a surprise profit? If that happens, that could give its share price a much-needed boost. Let's take a closer look at just how probable it is for Aurora to finally get out of the red in Q2.
How close is the business to breaking even?
When Aurora last released its quarterly results in November 2021, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss was 12.1 million Canadian dollars for the period ending Sept. 30, 2021. That was a sharp improvement from the CA$19.7 million loss it incurred a quarter earlier.
The challenge is the company still isn't generating enough revenue to cover some of its key expenses. Last quarter, the company's selling, general, and administrative (SG&A) expenses totaled CA$45.8 million and represented 76% of net revenue. That's a higher percentage than in the prior-year period when they accounted for 65% of net sales. And with an adjusted gross margin of 54%, there's simply not enough in the top line to cover those hefty operating expenses.
Aurora's SG&A expenses haven't changed much over the past year, and without a significant decline there, or a big increase in revenue, it could still be a stretch for the business to hit breakeven as early as Q2.
International sales should get a boost in Q2
In early January, Aurora reported that it delivered a medical cannabis shipment to Israel worth close to CA$10 million. It believes it is "the largest export of medical cannabis into the Israeli market." The company noted that the revenue will be recognized in Q2, and thus, should give Aurora's top line a nice bump.
Medical marijuana generates better margins for the company than consumer products; last quarter, Aurora reported an adjusted gross margin (before fair value adjustments) on medical cannabis of 64% -- versus 32% for consumer cannabis products. That means the new shipment could potentially add more than CA$6 million to Aurora's gross margin to help cover its overhead expenses. That would suggest that the adjusted EBITDA loss in Q2 could fall below CA$10 million. This of course assumes that the company's business performs similarly to how it did in the previous quarter. There's also the issue of how much additional cost the company took on in expanding its international operations, particularly in Israel. That will likely offset, at least in part, some of that additional margin for the business.
Profitability remains unlikely, but the company looks to be going in the right direction
Investors should expect to see an improved adjusted EBITDA number in Q2 in light of the international shipment and a continued focus on cost reduction, but I wouldn't expect the company to get out of the red just yet. The good news, however, is that with Aurora focusing more on higher-margin medical marijuana products, it may only be a matter of time before the bottom line is in the black.
The company continues to focus on cost savings, noting that there are opportunities to bring down some expenses related to its supply chain. And SG&A is another area where it plans to shed costs. Aurora maintains that it has a "clear path to profitability by the first half of fiscal 2023." That gives the business about a year to find a way to cut out at least CA$12 million (or less, if its adjusted EBITDA improved this past quarter) from its financials. Given that the company says it has identified between $60 million and $80 million in annual cost savings (and executed on just $33 million of that thus far), profitability should be a question of when, and not if, it will happen.
Should you buy Aurora's stock before earnings?
In the past year, shares of Aurora have fallen 62%, performing a bit worse than the Horizons Marijuana Life Sciences ETF, which is down 50% over that time frame. The pot stock is a volatile one and any time you buy it heading into earnings you are rolling the dice. Unless you're willing to take on significant risk, it's just not worth it. While the company may improve its bottom line, its underwhelming sales numbers could continue to keep growth investors away:
Aurora's shares trade at a price-to-sales multiple of just over 4, which is higher than Tilray, a cannabis producer that's generating more in revenue, and its operations are already profitable. Even if Aurora has a strong Q2, that may still not be enough of a reason to buy the stock. And buying it before the earnings result adds even more risk into the equation.