Let’s start with the bad news. Canadian pot stock Aurora Cannabis (ACB) dropped Wednesday as investors reacted to a third quarter earnings report showing weaker than expected sales, and a greater than expected EBITDA loss for the quarter. Aurora booked $65.1 million in sales during the quarter, and incurred an “adjusted EBITDA” loss of $36.6 million. The company did not even bother reporting the size of its net loss for the quarter as calculated under GAAP — so you know it had to be pretty bad.
The good news is that, once analysts got through opining on the quarter yesterday, investors were ready to chalk it up as a win. (And Aurora Cannabis closed trading Thursday up 2.4%).
Seaport Global’s report is instructive. Calling Aurora’s quarter a “slight sales miss (actually, Aurora missed Seaport’s sales estimate of $71.3 million by nearly 9%), Seaport analyst Brett Hundley urged investors to focus more on Aurora’s progress in bringing down production costs, and the potential for the company to sell higher-margin products so as to become able to earn better profits in the future. Hundley reiterated a Neutral rating on ACB stock without suggesting a price target. (To watch Hundley’s track record, click here)
Aurora doubled its production of cannabis from Q2 to Q3, gaining scale of production, and predicted it will produce as much as 25,000 kilograms of marijuana in Q4, currently underway. As production ramps up and production efficiencies kick in, this should help to grow gross margin (which came in at 55% in Q3 — four points below consensus).
Also helping to grow the gross will be new, higher-margin marijuana products. “Vapes” (cannabis oil that can be heated and inhaled in an e-cigarette-like vaporizer) and “gummies” (i.e. edible marijuana) are two products Hundley especially has his eyes on, noting that such “cannabis derivative products are expected to be available for sale in Canada” by October 2019. Not only does Aurora view these products as higher margin than plain marijuana “flower” (for smoking). The company also believes there’s a bigger market opportunity here than in cannabis-infused beverages, for example — which the analyst notes currently comprises “~2% or less of market share” in the U.S.
Not that Aurora is ignoring the smokables market, though — it’s just looking to extract extra margins there when possible. In particular, Hundley likes the company’s acquisition of “organic cannabis” producer Whistler, and its stake in The Green Organic Dutchman.
Notwithstanding Hundley’s optimism that all of the above will help perk up Aurora Cannabis’s profit margins going forward, for the time being, the analyst left his estimates for future sales and earning unchanged. As of today, Hundley is still projecting Aurora will end 2019 with sales of $268.3 million, roughly triple that to $833.9 million in 2020, then grow it another 50% to $1.25 billion in 2021. Earnings-wise … well, there still doesn’t seem to be much hope we’ll see GAAP profits anywhere in the near future. That being said, the analyst is still hoping to see Aurora turn “adjusted EBITDA” profitable next year (after losing $199 million in negative adjusted EBITDA this year).
That still doesn’t give investors much to hang a valuation on, unless you’re satisfied using price-to-sales ratios. With an unprofitable company like Aurora Cannabis, it seems you may have to be satisfied with that for some time to come.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
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