The global economic shutdown due to the coronavirus was a potential nightmare for Aurora Cannabis (ACB). The Canadian cannabis company is in the middle of cutting capacity and costs for the new reality in the market while trying to avoid running out of cash. A complete shutdown of cannabis stores would’ve crushed any remaining hope in financial improvements at the business, but the market has seen the opposite effect of the shutdown actually lead to a boost to cannabis sales as consumers stay at home.
On March 17, Canopy Growth (CGC) announced the closure of all 23 of their retail stores in Canada due to the Covid-19 outbreak. Since this point, sales have soared in Canada as consumers have rushed to purchase weed.
Several provinces including Ontario and Quebec have deemed cannabis stores as essential while the Ontario Cannabis Store’s website had the director of communications confirm sales over the weekend doubled the sales from only two weeks ago. Likewise, Nova Scotia reported cannabis sales spiked 76% last week.
Whether due to fears of store closures or adult users staying at home with no work, people have flocked to cannabis stores to ensure supplies to wait out the virus from home. In addition, a supplier like Aurora Cannabis gets the extra benefit of not having Canopy Growth stores open.
The one major caveat is that Canadian cannabis sales could yet be impacted as the virus outbreak rolls throughout the country and any lingering impact is unknown.
The sales boost couldn’t have come at a better time. The Canadian sector was flooded with cannabis supply and companies were struggling to generate profitable revenue growth. Aurora Cannabis alone had C$216 million in inventory on their books suggesting enough supply for the next year.
The company couldn’t afford another quarter of weak sales. Based on the initial sales indications from March, Aurora Cannabis should top analyst estimates for a revenue rebound to C$65 million in the current quarter. The company had net revenues of C$63 million in the December quarter.
The company has initiated a cost reduction program to get quarterly operating expenses below C$45 million. A key aspect of any turnaround is for Aurora Cannabis and the sector to actually generate revenue growth in 2020 with new retail stores opening and Cannabis 2.0 products launching. The combination will help cut the EBITDA losses.
Ontario was set to start allowing 20 new stores to open per month and the Covid-19 outbreak might provide some regulatory and construction delays, but the market should start seeing consistent growth in the key province. Aurora Cannabis has survived the bottom and can now continue with at-the-market equity sales to raise funds for operations and the last remaining capex spending.
The key investor takeaway is that Aurora Cannabis got the sales boost the company needed to get over the hump. The former CEO selling 12.16 million shares into the open market on March 16 was the headline that likely created a bottom in the stock below $0.70.
Aurora Cannabis should see the diluted share count balloon to 1.3 to 1.4 billion shares outstanding. As the company approaches an EBITDA breakeven level later in the year with the streamlined operations, the stock will finally get a footing back above $1.
According to TipRanks, the consensus on Wall Street is that Aurora stock is a “hold” for investors. But TipRanks might as well have said “buy” — because analysts, on average, think the stock, currently at $0.99, could zoom ahead to $1.71 within a year, delivering 71% profits to new investors. (See Aurora stock analysis on TipRanks)