In recent years, Aurora Cannabis (ACB +2.91%) has been trying to slash expenses wherever it could to improve its cash flow and bottom line. This has included closing facilities, cutting staff, and ultimately reducing its position in the consumer cannabis market in Canada.
The efforts have been paying off, as the company has posted stronger results of late, including positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for four consecutive quarters. It even posted a narrow unadjusted profit in its most recent results. And next year the company is projecting it will generate positive free cash flow.
Now that the business is on more solid footing, here's a look at why the cannabis company could be looking at mergers and acquisitions (M&A) in the year ahead.
NASDAQ: ACB
Key Data Points
Aurora Cannabis needs a growth catalyst
In the past, Aurora's problems stemmed from being too aggressive with respect to growth and not caring about its bottom line. These days, however, the company is struggling to consistently increase its top line. While sales did jump by 30% in the quarter ended on Sept. 30, Aurora also benefited from going up against weaker comparisons from the previous year when sales fell by 18%.
For the company to win back growth investors, it's going to need a catalyst to help drive revenue growth on a consistent basis. And M&A could help give the company that boost. Last year it acquired a controlling interest in Bevo Farms, which is a supplier of propagated vegetables. The acquisition has helped diversify Aurora's business model, and last quarter it added 7.2 million Canadian dollars ($5.3 million) to the company's top line -- more than 11% of Aurora's total net revenue of CA$63.4 million. Aurora acquired the company for CA$45 million.
The company is confident enough in its financials to pursue another deal
On Aurora's most recent earnings release, Chief Executive Officer Miguel Martin suggested that the cannabis company is going to be looking at ways to expand its operations through acquisitions. "Our balance sheet is in a strong net cash position to pursue profitable growth opportunities through M&A."
There's no mystery here for investors. Just like with the acquisition of Bevo Farms, Aurora is on the hunt for deals that can be immediately accretive to both its top and bottom lines. What stands out to me is the focus on profitable growth opportunities, rather than simply talking about expanding market share or just revenue growth alone -- which, in the past, has been the norm for not just Aurora, but other cannabis companies as well.
Plenty of opportunities available for Aurora in M&A
Now is an attractive time for Aurora to be looking for acquisitions because many companies have been struggling since early 2022 amid rising interest rates. Aurora can get some good value for its money by pursuing M&A right now.
One thing I wouldn't expect to happen, however, is for the company to acquire another Canadian cannabis producer. That would likely not be a profitable growth opportunity for Aurora. If profitability is indeed a key criteria for the business, then I can see the company looking at diversifying its operations again. One example could be to go into beverages. Rival SNDL, for instance, has bolstered its bottom line by getting into the liquor retail business. Tilray has also been busy acquiring U.S.-based alcohol companies as a way to not only diversify, but expand its reach in the U.S. market.
Aurora could also attempt to acquire a company to expand in international cannabis markets. But finding a profitable cannabis company that can also further its growth opportunities in key international markets may be comparable to looking for a needle in a haystack. If Aurora's looking at M&A, I think it'll do so within North America, and by further expanding outside of cannabis.
Any way for Aurora to expand its business outside of the highly competitive consumer cannabis market could be good news for investors, and that should help widen its margins. However, investors shouldn't expect a large transformative deal worth billions of dollars here. Aurora's management appears to be making smaller, more calculated moves in an effort to bolster its financials, which could be a recipe for success in the long run.
Aurora Cannabis is moving in the right direction, but the stock isn't a buy
If Aurora can find a deal that increases its top line while also strengthening its bottom line, that's the best-case scenario for investors. The company does appear to be on a more positive track with cash flow improving and Aurora reporting adjusted EBITDA profit, but it hasn't made enough progress to be a good investment just yet.
Investors should continue to take a wait-and-see approach with the business. If it decides to make another acquisition in the near future, that could give investors some valuable insight into the company's overall strategy and how it plans to expand its operations, and where its focus might be. For now, however, investors should avoid the stock, as it's still too risky to hold today.
