Following in the footsteps of Jefferies, which initiated Aurora Cannabis (ACB) with a “buy” rating last week, this week Cowen analyst Vivien Azer initiated the Canadian cannabis concern with an “outperform” (which by the way, means “buy”) as well. Cowen’s recommendation sparked a 12% rally in Aurora Cannabis shares on Tuesday, and for good reason: According to Azer, Aurora is the ”top pick in cannabis.”
Let’s begin with the obvious: Aurora Cannabis controls 20% of the Canadian marijuana market, which Azer says could grow as big as C$12 billion ($8.9 billion USD) by 2025. Already, Aurora’s marijuana brands “Aurora,” “AltaVie,” “San Rafael ’71,” and “Woodstock,” make it the No. 2 pot player in its home country, as measured by SKUs. (I know. It still feels strange to think of weed as something sold in a store, sitting on a shelf, and identified by its Stock Keeping Unit — but this is the world we live in).
What’s more, big as Aurora is already, Azer believes the company can grow even bigger. As the analyst explains, Aurora has a “cultivation footprint” large enough to eventually produce 575,000 kilograms — that’s 575 tons of weed — every year. This is supply that Aurora will be able to farm out (pardon the pun) far beyond Canada and into the 23 foreign markets where it also operates, helping the company to grab additional market share globally. According to the analyst’s estimates, the international medical marijuana market alone (i.e. not including recreational use) could be worth $31 billion by 2024, and Azer expects international sales to make up about 37% of Aurora’s revenue stream over time.
So Aurora Cannabis is big, and getting bigger. That much is clear so far. But is it a good stock to buy?
Azer thinks so, and yet, the valuation on this stock is not for the faint of heart. Aurora was profitable last fiscal year, but it’s lost money so far in fiscal 2019, and Cowen predicts the company will end its current fiscal year (in June) with a loss of C$0.25 — and then lose money again next year.
That’s actually a more pessimistic prediction than most analysts on Wall Street are making. As Azer admits, the “consensus EPS” estimate for Aurora is that the company will earn a Canadian nickel in fiscal 2020. And yet, Azer sees a “path to near-term profitability” for the company — even if it doesn’t necessarily arrive next year.
As the analyst explains, Aurora is likely to achieve C$305 million in sales for fiscal 2019, more than double that figure in fiscal 2020, then nearly double it again two years later, booking C$1.3 billion in revenue in 2022 — a 64% compounded rate of sales growth. By fiscal 2022, Azer sees Aurora earning 70% gross profit margins and 30% EBITDA margins.
The analyst doesn’t say how much net profit it expects Aurora to be earning by that time, but with or without profits, Azer estimates that Aurora Cannabis stock should be worth about a 14x multiple to sales.
As always, we like to give credit where credit is due. According to TipRanks, Azer has a yearly average return of 27.6% and a 67% success rate. Azer is ranked #67 out of 5,216 analysts on Wall Street.
Overall, ACB has 4 bullish analysts in its corner over the last three months, and 3 analysts playing it safe on the sidelines. The 12-month average price target among these analysts stand at $9.15, showcasing nearly 16% upside potential for the cannabis stock.
Check out the articles in this category focused on cannabis stocks. By gaining a strong foundation in both the fundamentals and technical details usually involved in cannabis stocks, you’ll be able to invest with greater confidence.
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