Given how awful the past five years of the cannabis industry have been, it's only natural for investors to wonder what the next five years will bring for the businesses attempting to make a turnaround, like Aurora Cannabis (ACB -0.15%). Far from being a fallen champion, this company's recent history is marred by frequent announcements of shuttered facilities and painful efficiency improvements.
Will the returns during its next half-decade make the ongoing struggles worth it for shareholders? It's possible. Here's why.
Can it make more money than it spends?
In the next five years, Aurora will have a few strategic priorities.
The first priority is to continue to cut costs and increase efficiency with the goal of producing positive free cash flow (FCF) -- or what's left from cash flow after business investments and capital spending -- sometime in 2024. Over the past three years, management claims to have made around 400 million Canadian dollars ($303 million) in cost savings by scaling down cannabis operations and selling extraneous cultivation space, so generating FCF will be a key milestone that's been a long time coming. In the second quarter, it reported positive operating income of CA$2 million, the first positive result since early 2016. If the next few quarters can build on that sum, hitting the target of positive FCF won't be a problem, which means by 2029 it could be a veritable cash machine.
It also plans to continue to try to consolidate its market share in the Canadian medicinal market. While it's unclear what it plans to do to make that happen, it also will continue to position itself internationally in the medicinal marijuana markets of 12 countries, including the U.K., Australia, France, Germany, and Poland. The idea is that if those markets legalize marijuana for adult use, the company already has some infrastructure in place to serve the anticipated rise in demand. It's likely that in the next five years at least one of its medicinal markets will expand to be primarily for adult use, so investors should expect significant catalysts for top-line growth. The challenge will be consolidating and maintaining its tenuous grip on profitability while expanding its operations to serve new demand.
Separately, Aurora anticipates that its plant propagation business, Bevo, is on track to double its revenue within the next three years. As Bevo itself is cash-flow positive on an annual basis, scaling up its sales will help to bolster the bottom line, perhaps significantly so. But investors should take care to temper their expectations. Propagating plants and selling orchids in Canada is probably not a line of business that is ever going to experience strong demand or persistent growth.
Don't bet on it making a string of home runs
Attaining all of the elements of the three strategic priorities described above would leave the Aurora Cannabis of 2029 in a significantly stronger position than it's in today. The comparisons looks even better if you consider how abysmally difficult the past few years have been for shareholders. But it's important to be realistic about what it is likely to accomplish and why.
The biggest challenge will be adding to revenue without backsliding on profitability. Over the last five years, its quarterly revenue only rose by 15%, reaching CA$63 million in its fiscal Q2. It will need to grow much faster to convince investors that its shares are worth buying at higher prices than they're trading for today. The only catalysts that could accomplish that would be if one or more of its international markets proceeded with cannabis legalization, which, obviously, is something it cannot control.
But there's reason for skepticism about how much of market share Aurora could actually gain in the event of legalization. In the crowded Canadian market, it's the leader in medicinal marijuana, but it hasn't been able to hold on to its recreational market share. In its fiscal Q2, it reported CA$12 million in recreational cannabis sales, down from nearly CA$14 million a year prior. That's a sign it doesn't have a competitive advantage with its recreational products in its home market. And without a durable presence at home, it's hard to imagine that it could find a winning formula for winning with recreational marijuana abroad, where consumer tastes may be more difficult to pin down and where the costs of doing business may be higher.
So in five years, the most likely outcome is for Aurora to be somewhat bigger and slightly more profitable than it is now. Penetrating emerging markets will keep pressure on its margin, as will the competition both at home and abroad. Its stock price may well rise from where it is today. But given how unstable and dismal cannabis stocks have been, there's still not enough of a bull thesis to make the stock worth buying.
