When there’s blood in the streets, all the naysayers come out and focus primarily on things that theoretically could go wrong with a company, and theoretically, what could happen in a specific market. That is happening with Aurora Cannabis (ACB) and other cannabis companies at this time, and also with the cannabis market generally.
In some cases of course companies deserve the negative outlook concerning them – both in the short and long term, because their performances are not only weak, but the way to increased sales and ultimate profitability are not visible at this time.
That’s not the case with Aurora Cannabis, and it’s not the case with the overall cannabis sector, which will continue to expand at a significant pace for many years.
In this article we’ll look at why the nail-biting concerning the long-term growth prospects for Aurora Cannabis and the sector are unjustified, even though there will continue to be some short-term pain over the next couple of quarters.
The Cannabis Sector
It’s readily apparent that nothing is going to stop the growth trajectory of cannabis for a long time. As a matter of fact, where it’s struggling is directly correlated with under performing government bureaucracies, heavy taxation, and regulations that differ from province to province of state to state.
Even so, the demand for cannabis in its recreational, medical, CBD, and industrial hemp forms, remains very high, and we’re really in the very early stages of growth in all of them.
It was inevitable that there would eventually be a correction in the cannabis market because of the heavy media coverage and investors bidding up the share prices of numerous companies.
But these types of sell-offs only last for a period of time before they reverse direction. When that happens in the cannabis industry, many of the stocks that have been getting hammered are going to start rebounding at strong levels.
That doesn’t mean we’re at the end of the sell-off yet, but it does mean investors should seriously start considering taking positions and holding them in the near future.
We shouldn’t try to time the lows, but should understand that when we do take positions they could still drop. The key is not to let pressure from further decline in share price (if that’s how it plays out) flush us out of our positions. Investors should look at holding for the long term when they invest under current market conditions, because when the turnaround comes, it’s going to reward those investing in companies with long-term potential.
The Long-Term Growth Landscape Remains Intact
The most important question to ask concerning Aurora Cannabis, or any cannabis company for that matter, is whether or not the narrative of the company remains intact. In the case of Aurora, nothing has changed concerning its long-term growth except it’ll take a little longer to generate a profit than originally believed.
Even there, most of that isn’t because of inefficiencies at the company, or a lack of productivity, but rather the extremely slow roll out of retail outlets in Canada, which were expected to be much further along than they are now.
Not too long ago, Ontario only had five physical locations consumers could buy cannabis products; that’s in a market numbering in the millions. While it’s still going to take time to reach market saturation and full potential, at least there is some progress being made on that front, and that will benefit Aurora, especially as it benefits from sales from derivatives in the first calendar quarter of 2020.
With production capacity expected to reach at least 650,000 kilograms annually by the end of June 2020, costs per gram continuing to drop, and gross profit coming in at a little under 60 percent, the long-term future of Aurora looks bright.
Add to that the fact it is getting ready to sale more into the European market because of the completion of two GMP-compliant facilities, and the company is poised to expand for many years. That should support wider margins and its path toward profitability because of price premiums and insurance coverage in Germany, as will its overall 84,000 medical cannabis patients, which are expected to continue to grow in number.
The only real concern at this time is how it’ll perform in the short term because of the lack of Canadian retail outlets, the length of time it’ll take to boost global sales, and its measured approach toward competing in the CBD market in the U.S.
Aurora Cannabis Is a C$14.00 Stock: Jefferies
Aurora shareholders have had a rough 2019, as Mr. Market chopped off more than 20% of the company’s stock price. One analyst, however, thinks this new, lower stock price could offer new investors an opportunity to get into Aurora on the cheap. Jefferies analyst Owen Bennett just recently reiterated a Buy rating on ACB with a C$14.00 price target, suggesting the stock could rise over 150% in the next 12 months. (To watch Bennett’s track record, click here)
The analyst believes the company boasts solid operating fundamentals which “paints a picture of a business in good health.” The analyst added, “When considered alongside one of the lowest valuations among peers (CY20 EV/EBITDA 8.6x, Tilray 8.9x, Canopy 10x, Cronos 12.5x), we continue to see upside from here.” (See ACB’s stock analysis on TipRanks)
Contrary to some commentators, the cannabis market is not experiencing oversupply at this time, especially in Canada. The problem isn’t demand, but the lack of retail outlets to sell cannabis to consumers. That is gradually getting fixed, and it should, in the near future, have a significant impact on the performance of Aurora.
Eventually supply in Canada will exceed demand, which is why the 25 countries Aurora has a presence in will help it to better manage the ceiling in Canadian sales, when it arrives.
In the short term Aurora will probably have to endure some more pain. My conclusion is once it has at least one quarter under its belt concerning selling derivatives in Canada, it ramps up sales to Europe, production capacity jumps to over 650,000 kilograms annually, and it slashes cost per gram to about $1.00 or lower, it’s going to being consistent growth that will give support and a steady increase to its share price.
For most stocks I don’t encourage investors to average down, but in the case of Aurora Cannabis, which has such a clear growth trajectory, while operating in a market that will expand for many years, it’s obvious this stock, even if it takes some more short-term hits, is going to do very well in the years ahead.