Aurora Cannabis (ACB -0.15%) has been cutting costs and improving its bottom line over several quarters in a bid to show investors that its operations are in better shape. That might make analysts more bullish about its prospects. The company recently released its latest earnings report, which again showed that its bottom line is getting better. But is it enough to prove to investors that it has turned its operations around, and that it's a stock worth investing in?
Aurora Cannabis off to a strong start to fiscal 2024
On Nov. 9, Aurora Cannabis reported results for its fiscal 2024 second quarter ended Sept. 30. The company says that "this is our strongest fiscal year to date," with Aurora reporting year-over-year growth and a positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit for the fourth straight quarter.
Revenue totaling 63.4 million Canadian dollars ($46.3 million) for was up 30% from the same period last year. Adjusted (EBITDA) of CA$3.4 million was also a sharp improvement from the CA$6.2 million adjusted EBITDA loss that Aurora Cannabis reported in the year-ago period. The company has been slashing costs in an effort to win back investors -- its shares are down more than 90% during the past three years.
Why investors shouldn't get too excited about these results
There are a couple of reasons to temper your expectations about Aurora. While management may be bullish on this being a sign that the business is in better shape, here's why the company still faces significant risk.
Although Aurora did post strong year-over-year revenue growth, that is misleading. That's because Aurora is going up against some soft numbers from the previous year. This is a company that has struggled to generate positive sales growth in the past. In the same three-month period last year, Aurora's total net revenue fell 18% from the prior-year period.
Context is important, and while Aurora's revenue is up compared to last year, that hasn't always been the case. And in the longer run, with the company focusing on the slower-growing medical cannabis market and moving away from consumer cannabis, there isn't much of a reason for investors to get optimistic that this type of growth can continue.
Another problem is adjusted EBITDA. This is not a true accounting profit, and what that ultimately means is that Aurora Cannabis has significant leeway in what it counts as part of its adjusted EBITDA calculation. There isn't a standard or consistent rule as to what should or shouldn't be in there, but in general companies exclude costs that reduce net income. It's one of the reasons investors shouldn't rely too heavily on adjusted earnings calculations. Aurora Cannabis did post a tiny net profit of CA$256,000 this past quarter, but it's nowhere near the CA$3.4 million adjusted earnings it reported.
Aurora promises free cash flow in 2024
One of the big targets for Aurora Cannabis next year is to achieve positive free cash flow. The cannabis company continues to reduce costs and operate more efficiently. And through the savings initiatives it has been executing in recent years, management believes free cash flow will be attainable next year.
Positive free cash flow is an encouraging development, as it can help show investors that the business is sustainable. Stock offerings, which Aurora has relied on in the past to raise money, may not be necessary in the future. Plus, with stronger cash flow, the company can pursue growth opportunities. Aurora has hinted that it may consider mergers and acquisitions down the road.
Aurora has made progress, but it still isn't a good investment
What I like about Aurora's recent results were that the business was able to reach breakeven and that it is on track to generate positive free cash flow in the future. But the problem is growth. That's the main reason investors flocked to cannabis stocks in the past. It's also growth that got cannabis companies into the problems they're in today. They were growing too fast and spending too much in a highly competitive industry.
Aurora may be profitable right now and generating free cash flow in the near future, but as it pivots back to focusing on growth, those problems may reemerge. The Canadian pot market is too saturated with competitors, while the U.S. market is off-limits due to the federal ban on pot. Aurora could expand internationally, but that's not a cheap option either, and the growth prospects there simply may not be all that attractive given the lack of progress in legalizing marijuana in other parts of the world.
Ultimately, while Aurora is an improved company, it's still not a business that's worth investing in.
