While all eyes are on the reverse split, Aurora Cannabis (ACB) investors should be more focused on FQ3 cost controls. The Canadian cannabis company has long had the ability to generate revenues, but the business has never matched those with viable operating expenses.
The company plans a reverse split before the market opens on May 11 to satisfy NYSE listing requirements. Most reverse splits are negative for shareholders, but Aurora Cannabis has the ability to showcase improving trends far outweigh a reverse share split.
According to TipRanks, the consensus on Wall Street is that Aurora Cannabis stock is a “sell” for investors. But TipRanks might as well have said “buy” — because analysts, on average, think the stock, currently at $0.67, could zoom ahead to $1.30 within a year, delivering 95% profits to new investors.
While the company will only have a post-split share count of ~110 million shares, the stock value isn’t enhanced by the split. The only way to reward shareholders is for Aurora Cannabis to report solid revenues while pulling down quarterly operating expenses.
Back in early February, Aurora Cannabis announced plans to lower SG&A expenses to a quarterly range of C$40 million to C$45 million. The goal is to set the company up for these quarterly expenses by the start of FY21 in July.
Analysts forecast sales rising from flat sequentially to around C$66 million in the March quarter based on commentary from the company. The analyst goal is another bump to C$75 million in the June quarter.
Hitting these sales amounts are crucial to confirm Aurora Cannabis can cut SG&A expenses that swelled to C$99 million in FQ2. The company is targeting a massive C$50 million cut while still growing revenues.
Reducing Cash Burn
Some analysts estimate that Aurora Cannabis burned up to C$200 million in the March quarter. The cannabis company has to slash this amount to negligible levels via cutting expenses and all but eliminating capital expenditures to survive and thrive.
The company only had C$205 million in cash to end the last quarter so controlling spending is paramount to not further dilute shareholders, especially when the market is so focused on the reverse split. Aurora Cannabis filed another C$350 million at-the-market offering that could dilute shareholders by over 30% with the current market cap below $1 billion.
Aurora Cannabis doesn’t plan to use the full ATM offering. The company had plans to reduce quarterly capital spending below C$50 million per quarter and these amounts need to be slashed to negligible levels where possible.
The key investor takeaway is that the valuation equation for Aurora Cannabis isn’t impacted by a reverse stock split, though traders will likely to attempt to short the stock lower. The shareholder impact comes from a lowered stock price causing more dilution to shareholders when the company sells stock to fund ongoing cash burn.
As the company should already have visibility into mid-June quarter numbers, the ability to pronounce a solid path to breakeven on an operating basis is key. On top of that, the elimination of nearly all capital expenditures would alleviate crucial cash burn levels. Aurora Cannabis has the plans for finally being on the right track supporting a stock rally from here, but any indication the company doesn’t have the cash burn under control when reporting quarterly results on May 14 will send the stock lower.
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