It remains puzzling to me to see the vast majority of analysts, financial writers and commentators, and the market in general, continue to fail to understand that management at Aurora Cannabis (ACB) has chosen a different route to growth and profitability, and I believe over time, it’s going to vastly outperform its competitors.
What’s of particular note is when a peer makes a specific type of move that attracts media attention, almost immediately we see the attention swing to Aurora in order to point out it isn’t doing the same thing.
The fact is, if I wanted to invest in one of those types of companies, I wouldn’t be taking a position in Aurora. To suggest Aurora should copy and follow the herd would make it much less of the company it is if were to give heed to that pressure.
Aurora’s low valuation remains a buying opportunity
While the financial media continues to pile on Aurora, recently driving its share price down, it maintains its adherence to its business model, which in my opinion has resulted in it being vastly undervalued when compared to its competition.
For example, when using the price-to-sales ratio as a metric, its approximate 67 is far below its chief competitor Canopy Growth, which has a hefty 133-plus. Another major competitor, Tilray, has a price-to-sales ratio of 77, even after plummeting from the dizzying heights of its 52-week by close to 85 percent.
As mentioned above, pundits and some analysts point to the lack of a catalyst for the company, as if being the market leader in production capacity, international markets and increasingly in the medical cannabis segment, isn’t enough to drive the share price up to where it deserves to be.
Alleged lack of catalysts
Easily the most referred to catalyst the company doesn’t have is a major investment from a large company. It is usually reported as Aurora not being able to attract a suitor. That, in fact, is far from the truth.
Management has stated it has been in numerous talks with potential large investors, but also said it isn’t interested in making deals like Canopy Growth and others have, where they give up a significant portion of the company control to others.
It’s not that Aurora isn’t able to attract investors, it’s that it has no interest in making a deal that it doesn’t have to make when it’s rapidly approaching profitability.
Another criticism is it hasn’t been aggressive in going after the American market, such as Canopy Growth has. Again, it has clearly answered that, saying there are a lot of issues with scale there, because of the differences in guidelines from state to state.
While recreational pot is growing fast where it’s legal in the U.S., it still remains a low-margin market that has limitations and inconsistency on the sales side. Medical cannabis on the other hand, has almost unlimited growth potential around the world, and generates more revenue, earnings, and wider margins. This is the market Aurora has targeted, and it will show the market the value of that strategy over the next several quarters.
What the market is essentially saying is, Aurora Cannabis, outside of its period of rapid acquisitions, has settled down into a boring company that isn’t generating big headlines any longer.
To me, this is a positive outcome because it’s allowing the company to absorb its various acquisitions while it ramps up production in anticipation of growing global demand for medical cannabis. At this time Aurora has a presence in 24 countries, far more than its nearest competitor.
I do believe there will be more headline events for Aurora, and that will give its share price a nice boost. That said, it’s not what investors should be looking for. Rather, they need to look at the different way the company does business, and its disciplined, efficient management, that is willing to sacrifice short-term value for long-term growth.
Aurora is getting close to having all the pieces it has built or acquired coming together, and that aligns with its production capacity soaring and demand for medical cannabis increasing at a solid pace around the world.
It’ll continue to sell into the recreational pot market in Canada, and it may even increase its current 50/50 ratio of medical vs. recreational cannabis in the next couple of quarters, as problems in Canada area solved.
Even so, the strength of Aurora Cannabis is its medical cannabis strategy, and in that segment of the market, it has no peers. It’s going to continue to extend its lead there over the next year or so, as all of its competitors are far behind it in the markets they compete in at the international level.
It’s only a matter of time until Aurora permanently breaks out, and when it does, I think it’s going to catch a lot of the naysayers by surprise because of their focus on recreational pot at the expense of the much more lucrative and longer-lasting medical cannabis market.
In that market, Aurora Cannabis stands head-and-shoulders above everyone else.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has a Long position in ACB stock