I remain bullish on Aurora Cannabis (ACB) over the long term, as the company improves its cost structure while positioning itself to drive sales from derivatives in the current quarter.
In this article, I want to focus on the positive growth catalysts that are visible, and where the company could surprise to the upside if the narratives plays out.
Most investors following Aurora Cannabis and other Canadian cannabis companies are aware of the limitations on their short-term growth prospects as a result of the slow licensing process in Canada and the resultant shortage of retail stores to sell cannabis out of.
While it’s clear to the market, investors interested in Aurora have to temper expectations for the company’s performance in the short term, as the latest number I’ve found is there are only 363 retail stores open in all of Canada. When the market is fully served, I think there will be at least another 1,500 stores opened, and probably more. That will take time to play out.
As for revenue, Aurora Cannabis should be able to capture a decent portion of the growing demand as more stores open. It has more than enough supply to meet whatever demand climbs to in the near term.
The good news for Aurora is that as more retail cannabis stores open in Canada, it’ll not only capture the obvious increase in recreational pot sales, but the increase in earnings as a result of higher derivative prices and wider margins.
In other words, it’s going to enjoy more revenue, not only because of more stores being opened and selling into the regular recreational pot market, but will add further to the revenue because of higher prices for derivatives. We won’t know to what level that’ll happen until the earnings report comes out after the existing quarter ends.
Aurora is prepared as well as any of its competitors to serve this potentially lucrative market.
The question for the last quarter is how much revenue Aurora managed to generate, after weak results in the prior quarter.
Where a Surprise Could Come
There is no doubt in my mind Aurora will eventually secure a CBD distribution deal in the U.S. It has appeared to be slow in taking action in this vital segment of the market, but the fact it, as far as I can tell, it’s been deliberate and patient in order to obtain the best deal, within the parameters of its business model.
What I mean by that is Aurora management has resisted, and rightly so in my view, giving up control of the company in order to get a big cash infusion. This has hurt the company in the near term, but if it’s able to put together a significant CBD distribution deal in the U.S., it will be a catalyst that will drive its value and share price up.
If it can do that without sacrificing control, it’ll do even better in the long term.
My thought is it would be surprising if there isn’t a CBD U.S. deal made as some point in 2020. How much it’ll impact the value of the company will be determined by the terms of the deal.
If it doesn’t give up control, I think current younger shareholders and investors will prefer that, if it does end up giving up some control, it’ll probably attract older investors looking for a larger cash cushion and level of safety.
Under that scenario, I believe Aurora will get a nice short-term and probably sustainable boost in its share price, but probably at the expense of long-term upside. It would perform more like Canopy Growth under those conditions.
TipRanks analysis of 10 analysts shows that the optimism isn’t dead (it just isn’t alive, either). Analysts are offering a consensus “Hold” rating on shares of Aurora, with 3 analysts suggesting Buy, 2 recommending Hold and 5 advising Sell. The average price target among these analysts stands at $2.83, which represents ~50% upside from current levels. (See Aurora stock analysis on TipRanks)
Aurora management has done a good of improving its cost structure without taking away its production capacity potential once the market turns around. As legal pot demand increases it’ll be able to rapidly complete the facilities where it has put construction on hold.
I see the company starting to sustainably increase revenue growth in at least the second half of calendar 2020, and possibly in the second calendar quarter. As it increases sales it also should generate revenue with wider margins and start to show a path to profitability.
If it surprises in any way on the positive side, or lands a CBD distribution deal in the U.S., its share price will soar.
I’m bearish on Aurora in the near term until I see its next earnings report for the last calendar quarter of 2019. If it has another quarter of declining revenue, it will take another hit; that would be exasperated if it ends up having to write down a past acquisition.
That’s the worst-case scenario in my opinion. I’m not concerned about that because I’m focusing on future cash flow as a result of its prior acquisitions. Nonetheless, it would scare some investors from an inevitable sell-off under those conditions.
Bottom line is Aurora still has all the pieces in place for a long-term run of increasing growth. It has its international medical business that will continue to grow significantly over time, and which I see eventually becoming the real foundation of long-term profitability.
For now, it’s going to be a rocky road in 2020, and if it does fail to do well with recreational and derivative sales in the first half, it’s going to come under further downside pressure.
Further out, once it rises out of the ashes, it’s going to make shareholders a lot of money.
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