It doesn't come as a surprise anymore when Canadian cannabis grower Aurora Cannabis (ACB -1.15%) reports disappointing quarterly results. The company has been on a roller-coaster ride for the last few years, failing to rebound. This year doesn't look any different. Though there are external headwinds such as regulatory hold-ups that delayed the opening of legal stores impacting legal sales in Canada -- much of the trouble was due to Aurora's slip-ups.
Driven by the rise in demand after legalization in Canada, Aurora went on an acquisition and expansion spree, burdening its balance sheet. Aurora's shares have dipped 80% in the last two years compared to the S&P 500's gain of 31%. Let's dive into its second-quarter fiscal 2022 results and determine if the company is planning to do anything different this year to get back on track.
Consistent declining revenue is not a good sign
Declining revenue has become a regular occurrence for Aurora Cannabis. In its recent second quarter (ended Dec. 31, 2021), Aurora's total net revenue declined 10% year over year to 60 million Canadian dollars.
The company had an early-mover advantage in the Canadian medical cannabis market, which helped it establish a good market presence. It could be the reason why Aurora saw a jump of 18% year over year in medical cannabis revenue. Despite the growth in medical cannabis, its consumer cannabis revenue plunged 48% to $14 million from the year-ago period. Aurora has failed to take advantage of the recreational market and has hardly launched many derivatives products that Canada legalized in 2019.
It appears management has realized the importance of these high-margin derivatives, which is why it stated in the earnings call its plan of "introducing a new range of products set to launch this spring" in the recreational segment.
Profitability seems far-fetched for Aurora in the near future
Adjusted EBITDA losses for the quarter came in at CA$9 million, versus CA$11.2 million in the year-ago period, thanks to a dip of CA$3.1 million in selling, general, and administrative expenses.
Aurora has missed achieving its positive target for earnings before interest, taxes, depreciation, and amortization multiple times by now, making investors skeptical. This has also taken a toll on its stock price. It has also been raising capital by issuing new stock since it received a delisting warning letter from the New York Stock Exchange (Aurora's shares fell below $1, which is against the trading compliance rules.) But this kind of heavy dilution doesn't sit well with investors, which is evident from its declining stock price.
In its Q2 fiscal 2022, Aurora's management promised again to hit EBITDA profitability by the first half of fiscal 2023. Management believes the company will hit the higher end of its targeted CA$60 million to CA$80 million annual savings by the same time.
It is these cost savings that have helped the company reduce its EBITDA losses from CA$80 million in Q2 fiscal 2020 to CA$9 million in Q2 fiscal 2022, which is a good sign. But with it consistently missing its targets, it's hard to believe it will be EBITDA positive by next year.
Image source: Getty Images.
Is there any hope for Aurora in 2022?
Aurora's long-term peer, Canopy Growth, is very keen to enter the U.S. cannabis market. And why not -- it is a burgeoning market and Canopy has managed to obtain some strong partners in the U.S. to help it expand its presence there.
But I believe Aurora's strategy to focus more on the Canadian market will help it in the longer run. The company is also excited about its growth in the European medical cannabis market, which it believes to be worth $5 billion by 2025.
Until Aurora is profitable, it will be difficult to enter the U.S. markets, especially when it lacks a strong partner. Moreover, the U.S. multi-state players are tough competition; most of them are also profitable. 2022 might be another challenging year for Aurora until the regulatory situation in the Canadian legal market improves and the company manages to grow revenue. It could be a few years before Aurora can be considered a worthwhile pot stock. I would advise investors to put their money in some better cannabis stocks.
