There are several things aligning for Aurora Cannabis (ACB) that will rapidly separate it from its competitors, including Canopy Growth. Among a number of areas, it leads the industry in production capacity, international markets it operates in, and is quickly slashing cost per gram to the point it should drop below a dollar a gram.
As it's doing this, it's ramping up its production rate to the point it will be selling a significantly larger amount of cannabis that produces positive EBITDA in the very near future; probably in this quarter, but without a doubt in the next quarter.
With that amount of inventory, and its production capacity expected to climb to a run-rate of about 625,000 kilograms annually by the first calender quarter of 2020, this will provide Aurora with a flexibility to allocate its product to various segments that none of its competitors can match at this time.
That's important to take into consideration because in the last quarter it reported it had to hold back some of its inventory in order to ensure it would meet its medical cannabis demand. That resulted in the loss of recreational pot sales that could have boosted its performance in the quarter.
Revenue vs. earnings
For some time I've been on record saying the companies most rewarded in the short term would be those that generate the most revenue. This is one of the major reasons Canopy Growth has been rewarded with such a high valuation.
That said, I've also said companies are going to have to start whittling down their costs as they boost revenue. Aurora has been doing an excellent job at it while Canopy Growth continues to suffer large losses.
For example, while Aurora has guided for probable profitability in this quarter, Canopy Growth reported an EBITDA loss of approximately $74.3 million in the last reporting period.
Over the next several quarters Aurora is going to have a lot of inventory to sell as it harvests from its huge capacity, while lowering the costs to the point of being profitable. This, in my view, is going to result in the company standing far above all of its competitors.
It also has the potential to add another 400,000 kilograms annually based upon its existing facilities and holdings.
Aurora has diversified itself geographically, by segment and by product, allowing it to reduce its risk exposure to recreational pot, which when demand is supplied in Canada, will cause enormous problems for the companies that don't have the alternative segments and markets Aurora does to supply.
The company easily has the largest number of markets it competes in globally, with a presence in 24 countries. It also has focuses primarily on medical cannabis, which commands higher prices and margins, especially in Europe.
While Aurora management has said it will continue to supply recreational pot for the Canadian market, it's not reliant upon it for long term growth.
In my opinion Aurora has the best management team in the business, as evidenced by its execution, discipline, and strength of its overall business plan.
It has rapidly scaled it production capacity out while lowering costs, which is about to allow it to increase revenue while generating positive EBITDA.
For these and other reasons, I believe Aurora is going to be recognized as the top marijuana company in the world within a year. I also believe its performance will encourage and justify that designation.
I see Aurora's share price having about 50 percent upside as the company stands today. If and when the company announced a partnership with a large company, that would likely change that projection to much higher, depending upon what the terms of the deal are.
Even the worst-case scenario is very positive for Aurora, and if it surprises to the upside in any way, again, it could surpass my positive outlook. On the down side, if it fails to achieve profitable EBITDA in the near term, it will weigh on the stock, especially if it misses by a lot.
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 Aurora Cannabis stock.
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