Aurora Cannabis (ACB) has a problem.
Valued at $7.1 billion, Aurora sold only $129 million worth of marijuana over the last 12 months. Worse, it didn’t make any money selling that weed — losing more than $160 million instead. Aurora sports a positive trailing gross margin of 67.5% on its product, but negative operating and net margins.
In order to grow into its valuation, Aurora needs to do two things: Scale up production (i.e. grow revenue) and reduce the cost of that production (i.e. become more profitable).
Growing more marijuana outdoors, where sunlight is free and you don’t need to pay an electric bill or maintain buildings — or even better, hiring someone else to grow their marijuana for them, sourcing the product from third parties and focusing on building Aurora’s “brand” in the marketplace — could help to solve both these problems.
This is why it’s such good news, says Jefferies cannabis analyst Owen Bennett, that Aurora Cannabis has just received two licenses from Health Canada to operate outdoor production fields for its marijuana. Bennett reiterates a Buy rating on ACB stock with a C$14.00 (USD$10.73) price target, which implies over 50% upside from current levels.
Aurora will employ the two new sites, located in Quebec and in British Columbia, not with the aim of increasing production necessarily, but rather “to develop new technology, genetics and intellectual property in order to drive sustainable, high-quality outdoor production.” To be clear, Aurora’s aim will still ultimately be to have someone else take care of the production for it, while Aurora focuses its efforts on “growing brands.” But in order to ensure that its subcontractors produce and sell it only product of consistently high quality and reliable attributes, Aurora first needs to get a better grasp of the science.
As Bennett explains, “for high quality flower, and higher quality derivative products (particularly vapour), cultivation [currently] needs to be done indoors or in a greenhouse.” Marijuana produced out of doors, in contrast, “is not at the required level, particularly around consistency from harvest to harvest.” Indeed, thanks to its long history as a banned and outlawed crop, outdoor marijuana cultivation is “around 100 years behind when it comes to modern breeding techniques and scientific development.”
As a result, Aurora sort of has to play catch-up here, and this is what it aims to do with its two new licensed sites. Located on opposite ends of the continent, running grow sites in Quebec (in the east) and British Columbia (in the west) will help give Aurora a better grasp of how marijuana grows in the field in two very different environments, allowing the company to experiment with different cultivation methods on both coasts. It will give the company the opportunity to refine the genetics of its plants in both environments, selecting and preserving those specific genetic profiles that will, in each respective environment, demonstrate greater disease and pest resistance, and require the least amount of upkeep by the farmers to which Aurora eventually wants to outsource production.
A successful test program, says Bennett, should drive down costs and permit more outsourcing of production, giving Aurora a first-mover advantage over rivals who have yet to figure out the trick of growing weed in the great outdoors.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.