With the negative sentiment surrounding the broader market and some negative news in the cannabis industry putting downward pressure on the pot market, the bears have sharpened their knives and are searching for anything negative that could undermine optimism going forward, especially concerning powerhouse Aurora Cannabis (ACB).
While some issues raised are legitimate, a lot of it includes the supposition that most of them could happen to the company, presumably crushing the share price of the company and leaving many shareholders disappointed.
One of the biggest concerns raised is cash burn. In this article we’ll look at why I don’t see that as ominous as some are suggesting, and why it’s highly probable revenue is going to continue to soar, margins widen, and profitability may not be that far away.
Cash burn
So far in fiscal 2019, Aurora has been burning cash at a rate of a approximately C$320 million. That includes investing and cash flow from operations. Assuming that were to continue, it means the company may have to finance about C$430 million annually.
So far the company hasn’t had problems raising capital. As of March 2019, Aurora reported it has C$534 million in unrestricted cash and securities. Based upon the above numbers, the company has a year of capital on hand to cover its burn rate.
Not long ago the company increased its credit facility by C$160 million.
All of this gives the impression of poor financials, but the numbers presented assume the company will continue to spend significantly on the investment side. Yet management has stated most of the pieces it wanted to put in place have been acquired, so my assumption is the level of investing is going to wind down below what it has been over the last year or so. That means its burn rate should shrink with it.
I’ve seen some analysts suggest the company may have to perpetually raise capital in order to survive, but I think that is far too pessimistic when considering its revenue growth trajectory, continuing to increase recreational and medical pot sales in Canada, as well as medical cannabis sales around the world.
While a major competitor, Canopy Growth, has struggled to increase revenue from the Canadian recreational market, Aurora has continued to do so. That’s important because Canopy has declared itself to be primarily a recreational pot company, while Aurora has stated its mostly a medical cannabis company.
Something else I haven’t seen many talk about concerning Aurora’s cash burn rate is that it’s going to benefit a lot from the upcoming approval from Health Canada to sell derivatives in the Canadian market. With its rapidly growing production capacity and decreasing costs of production per gram, this market will further widen margins while increasing revenue, providing a much more positive performance in the near future.
This will first have an impact in the first calendar quarter of 2020, as that will be the first full quarter of sales after approval is given. First sales are expected to start in the last couple of weeks of December 2019.
Considering the company guided for sales in the quarter ended June 2019 to come in at a range of C$100 million and C$107 million, it presumably would end the year at about four times that amount.
But that’s going to vastly increase going forward as the company increases production by over four times what it has been in the last fiscal year, to over 625 kilograms annually in less than a year.
Combined with its decreasing costs and expected decline in spending on investments, it should cause the company to cut its cash burn rate by a lot in the year ahead, and could even start to turn a profit.
The company already said it is on track for positive EBITDA for the quarter ended in June, and it is only going to improve in the quarters ahead.
The bottom line is, while cash burn is real and significant, the revenue growth trajectory of the company is being underrated as to how that will offset much of the cash burn, as the company cuts costs while boosting sales. For that reason I see cash burn as not being as risky as many are asserting.
Conclusion
Aurora has already given an unaudited look at some of its upcoming numbers for the latest full quarter, and while it was encouraging to many shareholders, the current negative sentiment for the broader market, as well as some negative news in the cannabis sector, has put downward pressure on the cannabis industry as a whole, and Aurora Cannabis in particular.
A lot of bearish articles have recently come out in the financial media concerning Aurora, and much of it gets into minutia to the point of being hysterical in some cases, concerning the alleged risks associated with the company.
The major problem with much of the writing is they focus only on the challenges faced by Aurora, and not the accelerating period of growth that is going to significantly surpass the performance of the company in fiscal 2019.
Taken together with lower costs, wider margins, increased production capacity, and especially lower investment costs, Aurora in my view, is much more healthy than most are now giving the company credit for.
When measured against some of its peers like Cronos and Canopy Growth, Aurora is undervalued, and considering how strong its growth is going to be over the next fiscal year, it is certainly going to surprise many in the market that don’t analyze the company as a whole, but cherry pick the potential negatives to give a much worse scenario than warranted.
Shareholders will have to be patient, but I think the company is going to far exceed current expectations, and is going to soar in growth in almost all categories the company competes in.
Disclosure: No position.