During the past five years, cannabis stocks have been a major disappointment despite the enthusiasm generated by important regulatory changes in the U.S. and Canada. One need only look at the performance of the Horizons Marijuana Life Sciences ETF, an industry benchmark that is down by 68% in the past five years. However, Aurora Cannabis (ACB -0.15%), one of the most popular companies in the sector, has managed to perform substantially worse than that.
It's quite the accomplishment, and at current levels, some investors might think that it is worth buying shares of Aurora Cannabis. Perhaps the stock can't fall much more, and if things change in the industry, it could be one of the winners. But would that be a wise move? Let's look into what's going on with Aurora Cannabis before deciding.
Financial results have improved
Aurora Cannabis's latest financial results, for the second quarter of its fiscal year 2024 (ended Sept. 30), were pretty decent, at least by its standards. Its revenue of 63.4 million Canadian dollars ($47.3) increased by 30% year over year. It also reported a record adjusted earnings before interests, taxes, depreciation, and amortization (EBITDA) of CA$3.4 million, compared with an adjusted EBITDA loss of CA$6.2 million.
One of the biggest reasons behind Aurora Cannabis's improved performance in its latest period was its medical cannabis business, which operates in Canada and several countries abroad. These results were in line with Aurora looking to improve its overall financial position. In September, the pot grower announced it had repurchased $9 million in convertible debt the month before. The company raised money by issuing 20.1 million new shares.
The cannabis company is looking to become free-cash-flow-positive during the 2024 calendar year. Still, although the past few months have been a bit better for Aurora Cannabis, that hardly makes up for nearly five years of inconsistent results.
ACB Revenue (Quarterly) data by YCharts
The question is whether the company can maintain this momentum.
Aurora's prospects are uncertain
One of the reasons behind Aurora Cannabis's poor results in recent years is that the recreational cannabis market in Canada has been a mess. Seeing the vast opportunities in this field after national legalization, scores of companies rushed to enter, leading to a supply glut. And that's not to mention that illegal channels remained and put even more pressure on the market. Finally, regulators in Canada made it extremely challenging and complicated to obtain licenses.
In its latest quarter, Aurora's consumer cannabis revenue declined by 13% year over year to about CA$12 million. It's impossible to predict how things will evolve in Canada, but it's worth noting that there have been positive regulatory developments in the U.S. Last year, the U.S. Department of Health and Human Services (HHS) recommended to the Drug Enforcement Administration that marijuana be rescheduled from a Schedule I controlled substance to Schedule III, making marijuana a drug subject to much less onerous restrictions.
This wouldn't be the same as legalization at the federal level, but it would be a step in the right direction. Of course, the DEA is not obligated to follow this recommendation, so investors shouldn't bet on it just yet. But what if it does happen? Better yet, what if legalization at the federal level happens? As we learned from the Canadian experience, that's no guarantee of success for any company or even the entire industry.
Many of the challenges that affected the Canadian recreational market could affect the U.S., too. So even if the best-case scenario happens in the U.S., Aurora Cannabis's prospects would remain uncertain.
Not worth the trouble
Aurora Cannabis has relied on its medical cannabis business to keep its revenue growing. That's not a bad thing, but there is no telling how things will unfold from here for the company. And although it promised investors positive free cash flow this year, Aurora Cannabis has missed projections in the past. Unless the company can show consistent growth for a while, it isn't worth investing in the stock, and Aurora Cannabis isn't even close to that yet.
