Nearly five years ago, Aurora Cannabis (ACB 1.53%) acquired medical marijuana company MedReleaf in an all-stock deal valued at roughly 3.2 billion Canadian dollars ($2.4 billion). Today, Aurora Cannabis is a small fraction of that valuation. At the time, there was a lot of excitement in the emerging Canadian pot market. Now, that hope has turned to despair as companies struggle to both grow and stay out of the red.
Aurora is showing signs of progress, but is it on the right track, and will the business be in a better place a year from now?
The company's financials are improving but the business still isn't sustainable
On Feb. 9, Aurora Cannabis released its second-quarter results for the period ended Dec. 31, reporting positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$1.4 million. That's an important milestone for the company, which a year ago, reported an adjusted EBITDA loss of CA$7.1 million. Getting to positive adjusted EBITDA was a key goal for the company's management.
The problem, however, is that the company is still bleeding cash. During the period, it used up CA$60 million in its operations and CA$130 million on debt and interest payments. Without positive operating cash flow, it's going to potentially lead to more dilution down the road, which has already been a big problem for shareholders.
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One way it can improve its financials is by focusing on the medical marijuana market, which has helped it achieve adjusted EBITDA profitability.
Could Aurora make more of a pivot toward medical marijuana?
The Canadian cannabis market is highly competitive and saturated. Investors have to look no further than the once-leading cannabis company in the industry, Canopy Growth (CGC 3.51%), as proof that companies are starting to give up on the market. Canopy Growth has divested its Canadian retail operations and is scaling back, transitioning to what it calls "an asset-light model in Canada."
The one area where Aurora has found success is by focusing on medical marijuana, especially as it has expanded internationally. In that segment, Aurora reported a positive gross profit (before adjustments) of CA$13.1 million in the second quarter versus a loss of CA$8 million on the consumer side. If Aurora is serious about remaining profitable and improving its cash flow, it's clear that it would need to focus on the medical segment more so than the consumer one. And that's already the path that the company has been on.
This past quarter, medical marijuana net revenue totaled CA$39.5 million and represented 64% of its top line. Three years ago, in 2020, medical marijuana sales for the same period were CA$27.4 million and accounted for 49% of all net revenue. It seems to be no coincidence that as the company has been pursuing medical marijuana products, which command better margins, its financials have improved.
Will a turnaround happen?
Over the past 12 months, Aurora's stock has plummeted almost 80%. And even with these improved results, I don't think it's enough for the stock to suddenly become a buy. Aurora is still burning through cash and I wouldn't expect that to change in just a year from now. Its sales in Q2 were also up only 2% from the prior-year period. And its medical marijuana sales were down 14%, which the company blames on the "timing of sales to certain international export markets." If that's true and the growth rate does improve, there could be some potential for the stock to attract contrarian investors.
But overall, there isn't enough of a reason to be bullish on Aurora's stock today. The company isn't generating any meaningful growth and still faces significant challenges down the road. Investors shouldn't assume things will get any better in the near future and should continue to avoid this troubled pot stock.
One year from now I expect the situation to be much the same as it is right now for Aurora Cannabis, with the company still struggling to grow -- except the stock will likely be even lower.
