Canopy Growth’s (CGC) announced intention to purchase Acreage Holdings dominated headlines last week. In fact, it dominated headlines so much that many investors may have missed the note that Cowen’s Vivien Azer put regarding Canopy competitor Aurora Cannabis (ACB).
That would be a crying shame — because in Azer’s estimation, there may actually be more reasons to buy Aurora Cannabis stock, than Canopy.
Let’s run down the list.
A race to scale
For all that investors have been fascinated by the growth of the marijuana industry for the past several years, the fact remains: This is still a very young industry, and in young industries like this one, the first challenge is generally to scale up quickly, grab market share, drive out competition — so that by the time the industry matures, they’ll be able to keep more profits for themselves.
Aurora Cannabis aims to win this race.
Already, Aurora says it’s ahead of its targeted annual rate of 120,000 kilograms of annual marijuana production capacity for this time, this year. Annualized, management says it’s now producing at something more like a 150,000 kg-per-year rate.
150,000 kg — and growing. As Azer reports, Aurora is expanding square footage at its Aurora Sun facility to 1.6 mm square feet so as to add 230,000 kg in annual capacity. Production rates at the Aurora Sky facility are also on the upswing, and in consequence, Aurora management says it is raising its targeted production capacity by 25%, from 500,000 kg to 625,000 kg annual production — a goal it hopes to reach by mid-2020.
To put that in perspective, Canopy Growth says it is looking to produce only 400,000 kg by mid-next year — less than two-thirds of Aurora’s target — albeit Azer notes that Canopy’s target may be “conservative.”
Why expand production capacity so much? To create greater supply, of course, to serve the market — but also to win production efficiencies derived from scale. Aurora Cannabis believes that once it reaches its targeted level of production, it should be able to cut cash costs nearly in half, from about C$1.92 per gram of marijuana produced currently to under C$1 per gram.
Gross margins equaling sales minus the cost of the goods sold, such cost cuts should be very good news for Aurora Cannabis’ profit margins.
Already, Azer says Aurora boasts 61% trailing gross margins, or twice the 29% margins that Canopy produced over the last 12 months — and Aurora’s margins have exceeded 50% for the past eight straight quarters. With lower costs, the analyst estimates Aurora could grow its gross margin to as much as 70%, the best rate in the industry.
What to expect on earnings
Granted, Aurora’s net margins remain negative, but perhaps not for long. Most analysts expect Aurora to turn profitable as early as next year. As for this year, Aurora expects to have 25,000 kg of cannabis produced, packaged, and ready for sale in fiscal Q4 (ending in June). Azer says its own “conservative” estimate is that Aurora won’t sell more than 16,000 kg this quarter — but will be happy to be proven wrong, as this would mean only “upside to our forecasts.”
For an analyst that rates Aurora Cannabis “outperform,” that’s a good thing.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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