Shares of Aurora Cannabis (ACB -5.52%) popped last month. The cannabis producer didn't release any earnings number or announce a huge deal. Instead, it benefited from the news that the German government was proceeding with what Aurora calls a "landmark legalization achievement," by passing marijuana reform that will make it easier for medical marijuana patients to obtain cannabis.
Can Aurora's stock build on these recent gains, and could this be the start of a much bigger rally?
Could reform in the German market lead to a significant boost in Aurora's sales?
Aurora is in 15 cannabis markets around the world, with Germany being the largest and among the most attractive for the company. Aurora says it has a leadership position in the country and that it is "well-positioned to benefit from de-scheduling and potential recreational markets."
The company hasn't quantified what this recent reform in Germany will mean for the business in terms of actual dollars, and it doesn't break out revenue per country, but it does expect this will broaden the medical marijuana market. And with Aurora pivoting to the medical market in recent years while also focusing on international growth, it may potentially benefit the most from the developments in Germany.
Aurora's financials have been showing signs of improvement
Aurora has been making strides, not only in generating revenue growth, but also with respect to its bottom line. In February, the company released its most recent earnings numbers, with net revenue for the last three months of 2023 totaling 64.4 million Canadian dollars, rising by 5% from the prior-year period. It also posted record adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$4.3 million. However, it still incurred a net loss of CA$25.2 million for the period -- down from a loss of CA$62.4 million a year ago.
By becoming leaner, trimming costs, and focusing on a higher-margin medical marijuana segment, Aurora is arguably in a better position today than it was a few years ago, with a more sustainable operation. For the current calendar year, the company also expects to achieve positive free cash flow, which would be another great achievement for the business.
Should you invest in Aurora Cannabis stock?
Germany's medical marijuana market loosening up should definitely help give Aurora's revenue a boost, but how much it will amount to is questionable. The risk for investors is in overstating the importance of these recent events and what they will mean for Aurora. Although the German government has passed marijuana reform, there are still restrictions in place and the market isn't fully opened up.
Without the expectation of significant revenue growth due to these recent developments, this could be another case of Aurora and other cannabis stocks jumping due to favorable marijuana-related news, only for them to potentially give back some of those gains later on. While Aurora's revenue is likely to rise from a broader German market, it may not result in a much higher growth rate than what the company has recently achieved.
Although Aurora is in a better financial position today, it's still a risky stock. It isn't profitable, and with revenue only rising by 5% in its most recent quarter, it's also not a great growth stock. Unless the company's next quarterly results include a promising outlook for what the new German legislation means for the business, I'd expect this to be a short-lived rally.
