The last five years have been downright brutal for the cannabis industry. Pick a cannabis stock and you'll likely find a horrible investment to own during that stretch. Aurora Cannabis (ACB -0.15%) has gone from being a promising growth stock to an ultra-risky investment.
However, the good news is that with the company focusing more on cutting costs and becoming leaner, and now also expecting to generate positive free cash flow, its future may actually be getting brighter. Here's what may happen with the business over the next five years.
Aurora will continue its global expansion
One of the ways Aurora Cannabis has been strengthening its business is by focusing on medical-marijuana products. It's a good way to improve its margins and not get into a race to the bottom with other consumer-cannabis producers. CEO Miguel Martin credits its high-margin cannabis business for helping Aurora post a positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit for four consecutive quarters. Martin also highlighted record-revenue numbers in Europe and Australia last quarter.
Medical-cannabis net revenue in the most recent quarter, which ended on Sept. 30, totaled 43.8 million Canadian dollars ($32.3 million), which was nearly four times Aurora's consumer-cannabis net revenue of just under CA$12 million ($8.9 million). For Aurora to continue growing over the next five years, I expect the company will work on expanding into more medical markets and potentially going deeper into the ones it is already in today.
That strategy is the soundest for the business moving forward as it could allow Aurora to protect its margins while also finding more opportunities for growth; the company's medical-cannabis net revenue rose by 42% last quarter.
The business will remain unprofitable
Aurora has been profitable on an adjusted EBITDA basis with growing consistency of late, and last quarter, it also hit breakeven with its net income totaling CA$256 thousand. It's a remarkable accomplishment for the company, but it's a bit too early to tell if this will be the start of a new trend or if it was a one-off profit for the business.
The company has been slashing its expenses and reducing its footprint in Canada in recent years to help bring down its expenses. But the challenge ahead is that Aurora is inevitably going to get back to focusing on growth initiatives, and with those come greater operating expenses. If those expenses rise at a higher rate than revenue, the result could be the bottom line falling back into the red.
Given that I expect Aurora will continue to spend on growth, I wouldn't hold out too much hope of this being a profitable business five years from now.
Aurora's dilution streak will continue
One of the most frustrating parts for Aurora Cannabis investors has undoubtedly been the dilution. Over the years, the company has regularly relied on stock offerings to fund its operations.
ACB Shares Outstanding data by YCharts.
If the company can achieve its goal of achieving positive free cash flow in 2024, that could be a positive sign that it may be moving in the right direction and that the business will be self-sufficient. But that's not something I would expect to happen. Even if the company achieves positive free cash flow, it may still need to use cash to pursue other growth opportunities or acquisitions in a bid to grow its top line.
There's an outside chance the dilution will end, but it would be a shock if Aurora's financials improved to the point it didn't need to raise cash anymore; it's not a scenario I would count on happening.
A buyout could be the most likely scenario
As Aurora cleans up its financials, focuses on profitability, and slowly shifts away from the consumer-cannabis business, I suspect it may be trying to make itself a more attractive acquisition target.
If it can replace its consumer-cannabis revenue with international-cannabis revenue, it can fully exit the Canadian consumer-cannabis market within five years and still be at a comparable revenue figure. If it no longer is a consumer-cannabis producer, its margins would be even better, and it would become a more attractive acquisition for a big pharmaceutical company or beverage company looking to expand into the cannabis industry. Even if it's not profitable, Aurora could still be a more desirable cannabis investment than other pot stocks.
Is Aurora Cannabis stock a buy?
Aurora has improved its operations, but make no mistake: There is still plenty of risk with the stock. There isn't one promising market that it's in right now that you can point to and say that it will generate significant growth and make this a stock worth buying.
I expect Aurora will exit the consumer-cannabis business within the next five years, and upon doing so, a larger company will acquire it. But even if that were to happen, that doesn't mean the stock will be a good buy as its valuation may continue to plummet before then.
The net result is that Aurora's stock still isn't worth buying today. Trimming down its operations and focusing on international markets can be a good way for the company to improve its margins, but it's not going to make Aurora the exciting growth stock it once was, nor is it likely to become a profitable business, either.
