Aurora Cannabis (ACB) has been under downward pressure lately, primarily because of the broader market becoming increasingly risk averse because of the uncertainty surrounding the trade wars and saber-rattling in the Middle East.
This has caused a lot of investors to move their capital into what they perceive as safer places to park their money, which has resulted in the cannabis sector as a whole losing value and overall positive sentiment, which has had an effect on the share price of Aurora Cannabis, even though it still remains up over 50 percent on the year.
There is no doubt the stock will rebound from this, and one of the key catalysts that will be part of that is the upcoming legalization in Canada of CBD edibles, extracts, beverages and topicals in the latter part of 2019.
Combined with its rapidly increasing production capacity, the company is positioned well to boost sales as a result of these changes.
Strong demand for alternative consumption
In the short term Aurora Cannabis is going to get a nice boost from recreational pot sales in Canada, as last quarter it accounted for a little over 50 percent of the company's overall sales. I anticipate that becoming a larger percentage of sales over the three quarters at least, before it probably starts leveling off again as recreational pot supply meets demand in Canada.
Over the long term it'll be more beneficial for Aurora to reduce its exposure to low-margin recreational pot, but for now, it's an important part of its growth narrative.
The good news in that regard is edibles, extracts and topicals, because of their demand and popularity, generate wider margins than dried flower. That means not only higher revenue, but also better margins and earnings.
Barring any unforeseen events, this should become legal in October. Assuming the supply chain issues that have emerged after recreational pot was legalized in Canada aren't part of the next stage of legalization, it should provide a nice boost to the last quarter for Aurora, which is already projected to significantly boost sales in the second half of the calendar year. This won't come from sales, which won't be allowed until 60 days after the legalization on October 17, rather it'll come from an improvement in investor sentiment, as they look forward to the impact in 2020.
That said, the initial practical boost concerning the performance of Aurora from the legalization of edibles and other means of pot consumption will be in the first calendar quarter of 2020.
Aurora Cannabis will have about an annual run rate of 625,000 kilograms in the first half of 2020, making it easily the leading cannabis producer in the world. From the point of view of supply, it will be more than able to meet any demand from the markets it competes in.
There has been some concern about what Aurora will do if its supply exceeds demand in all the markets it competes in. Under that scenario it would have to find a way to sell or use its excess product. I'm not yet convinced it's going to be an issue because it will use some of its pot for extraction; not all of it is being produced for immediate sale.
Another thing to take into account is Aurora's production scale will continue to lower its market-leading cost per gram, which should bring it to profitability before the end of 2019.
Add to that the increase in margins from Canada legalizing CBD edibles, extracts, beverages and topicals in 2019, and being a big part of its revenue and earnings in 2020, and it's easy to see the key catalyst this will be going forward for Aurora.
It's one of many reasons I remain a short and long-term bull on the company.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author is Long ACB.
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