Aurora Cannabis (ACB -2.96%) hasn't been a very rewarding stock to buy in recent years. Far, far from it. But, with a concerted effort to reverse its fortunes in progress, it just might be able to perform better between now and 2026.
Does that make this stock, which is down about 95% in the past three years, a buy right now? Let's investigate.
Things are looking up
Despite the crash-and-burn stock history, there's a small body of evidence indicating that Aurora Cannabis is succeeding in making a turnaround. For investors, betting on that turnaround evolving into a bull run for the stock means believing that the company's problems will continue to abate, enabling it to reach profitability while maintaining or increasing its market share. That's a tall order, and it's a risky bet to make, but it isn't as outlandish as it might have seemed a mere year ago.
On Feb. 9, the company reported its earnings for its fiscal second quarter of 2023, which ended Dec. 31. One bright spot was that its sales were up by 1.1 million Canadian dollars ($820,000) from the same quarter a year ago, reaching a total of CA$61.7 million. That means its brands of cannabis aren't losing market share despite the ongoing collapse of the Canadian marijuana market, where it's the leading medicinal operator by revenue. Another positive development was that the company reported positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$1.4 million for the quarter, fulfilling a promise that management made and inching it closer toward generating cash instead of burning it.
Now, with management heralding the completion of Aurora's strategic transformation plan, the next task will be to pursue profitable growth without repeating the mistakes of the past, specifically building too much production capacity for the level of demand in the Canadian marijuana market. On that note, it's laudable that the company was able to slash its excess operations by making layoffs and closing facilities in time to meet its self-imposed deadline for reaching positive adjusted EBITDA. And it probably won't overbuild this time around either because management has repeatedly signaled that profitability is a higher priority than top-line expansion. But unfortunately, the next leg of the journey toward profitability is going to be just as hard, and there are a few indications that things aren't going as planned.
Don't log in to your brokerage just yet
The case against buying Aurora, however, is much more compelling than the argument in favor of buying it.
By definition, reaching profitability requires slashing costs or increasing revenue. But in Q2, Aurora Cannabis reported that its adjusted gross margin, when calculated without any changes from the fair market value of cannabis and without considering its bulk wholesale business, fell to 49%. That was lower than the prior quarter's adjusted gross margin of 54%, not to mention the adjusted gross margin of 54% from a year-earlier quarter.
Furthermore, astute readers will note that the figures above are reported by the company on a heavily modified basis, which means that they were calculated using a slew of nebulous accounting adjustments and exclusions. Without making all of those accounting concessions, Aurora's quarterly gross margin is still negative, and it shows no upward trend over the last three years. Likewise, without making any adjustments, its quarterly EBITDA is still deep in the red. And over the past 12 months, it hemorrhaged more than CA$181.3 million in cash. It still has CA$258.9 million in cash on hand, but its trailing-12-month total expenses were quite large, at more than CA$467.8 million.
Soon enough something will need to give for the company to operate at its current level of expenditures for the next few years. Expect it to take out fresh debt or to issue new stock -- neither of which is positive for shareholders.
Beyond the next year, an even bigger problem is that it hasn't demonstrated any kind of competitive advantage that it might use to defend its market share or to reach the profitable growth that management is targeting. So it's likely that larger competitors in Canada will force it to spend on marketing to remain in the running, keeping its costs high. Add that to the host of issues outlined above as a great reason to avoid buying this stock.
