Investing in companies that are in the midst of transformational changes implies high risks, but there's sometimes the promise of rich rewards too. On that note, Aurora Cannabis (ACB -1.49%) is a business amid a major transition, with its fortunes (and the fortunes of its investors) in flux in the short term.
With its shares free-falling by more than 97% over the last three years, it's possible that shareholders will soon get a reprieve, but it isn't guaranteed. Let's map out the cultivator's next 12 months to see what it's trying to do and whether it has a chance of getting there so that it's easier to make a judgment about whether to invest.
Near-term goals may be out of reach
Right now, Aurora's situation is tenuous.
Due to intentional production cuts and slack demand in the Canadian cannabis markets, its quarterly revenue fell by 8% year over year as of the fourth quarter, and the company is nowhere near profitable. While its leadership in the Canadian medical marijuana market is yielding some revenue growth, its position in the Canadian recreational market is eroding rapidly, with sales crumbling by 35% since the last three months of its 2021 fiscal year. If that trend continues, it'll be hard to reestablish its market share down the line.
In terms of its efficiency, Management predicts that the business will reach a positive adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) run rate by the end of the 2022 calendar year, but it's uncertain whether that'll happen. For reference, in Q4 of its fiscal 2022, its adjusted EBITDA was $12.9 million Canadian dollars, a minor deterioration from the prior quarter. The issue was that Aurora's average selling prices dropped due to an unfavorable shift in its sales channels, which doesn't bode well for the coming quarters.
So, the business won't be profitable anytime soon, and it's only distantly possible that through a combination of cost-cutting and selling higher-margin products like vaporizers and edibles it'll reach its adjusted EBITDA target. But one year from now, it's reasonably likely that on an adjusted basis it'll be reporting earnings in some form instead of losses, and things aren't nearly as dire as they might appear.
Don't count it out just yet
Aurora has the resources it needs to make a turnaround, though it might take more than the next 12 months to do so.
At the moment, the company has CA$380 million in cash and equivalents. With a cash outflow of only around CA$142 million in its 2022 fiscal year, there's next to no chance of Aurora becoming insolvent anytime in the next year or two, even if it continues with its acquisition activity. That's good news, as it gives management plenty of room to keep making efficiency improvements to its existing facilities while picking up useful businesses as desired.
In late August, it acquired a majority interest in Bevo Agtech, a vegetable supplier, for CA$45 million in cash up front and as much as CA$12 million in follow-up payments over the next three years. As part of the Bevo purchase, one of Aurora's underperforming cannabis facilities will be converted into growing other plants after being transferred to Bevo's control, which should cut down on the costs of shutting the facility down or spinning it off altogether. It's also expected to drive some growth from Bevo's soon-to-be-expanded cultivation output. So, don't be too surprised if management chases similar opportunities that can address multiple objectives within the mission to become more profitable.
Is it worth buying right now?
In late 2023, Aurora will almost certainly have significantly less cash from expenditures on operations and acquisitions. Its top line may still be shrinking, and it'll still be burning money on a non-adjusted basis. Even with operational improvements that beef up its margins somewhat, it'll still have a handful of issues with its long-term sustainability. Its shares could easily fall even further between now and then, though massively positive wildcards like cannabis legalization could also be in play.
Therefore, it's probably best to avoid buying any shares, at least until there are significant signs of improvement in its profitability over the course of multiple quarters.
