Aurora Cannabis (ACB) is rapidly proving to be the top cannabis production company in the world, as none of its competitors are even close in production capacity; it's one of the top revenue generators in the sector; and within this quarter or the next, is going to produce positive EBITDA.
With its foot on the accelerator in these areas and others, it's going to become increasingly apparent that it's the bellwether or the cannabis sector, and it won't be long before the market starts rewarding it for that.
Many in the market are looking at the wrong things
For now Canopy Growth has received a higher valuation than Aurora, primarily because it is operating in a manner the market understands. For example, accepting and receiving a large cash infusion from Constellation Brands, that is always waves in front of the market in its earnings report and press releases.
Since Aurora hasn't been willing to give up a significant portion of the company in exchange for an investment by a huge suitor, the market has punished it for it when compared against Canopy Growth.
Another factor has been the hoopla surrounding Canopy Growth preparing to enter the U.S. market via Acreage Holdings once recreational pot is legalized at the federal level, which at best, won't happen for many years.
In both of those cases many analysts and pundits compared Canopy against Aurora, concluding Canopy had made the best moves. After its surprising C$98-million loss in the first quarter, the market seems to be reconsidering the performance of Canopy Growth, even with the $4 billion or so on its balance sheet.
For Aurora, I consider it a wise move to not sell off a huge piece of itself in exchange for capital and board seats from a huge company, and also a good move to find a more opportune time and way to enter the U.S. market.
I don't consider these a negative for Aurora, but the opposite: disciplined decisions and patience that as usual with the company, pays off in big dividends once it's understood the strategy the company is employing.
Production capacity, revenue and positive EBITDA
No company comes close to Aurora Cannabis in production capacity, as it should be able to produce about 625,000 kilograms annually by early 2020, and of course its revenue will climb in conjunction with the increase.
What's most impressive about this when measured against any of the top producers is Aurora will be easily the first company to become profitable in the sector. This is one of the major reasons billionaire Nelson Pelz had advised the company that it didn't have any reason to seek out a major partner for the purpose of raising capital.
That doesn't mean the company isn't going to enter into some partnerships with large companies, only that they're going to be structured differently than giving up large stakes in the Aurora in exchange for cash. I expect them to be more on the distribution side of the business with shared profits.
Profitability is expected in the current quarter by management, but if it does slightly fall short, it certainly would come in the following first fiscal quarter of 2020.
Aurora Cannabis is undervalued in my opinion, primarily because the market has looked for it to operate in conventional, traditional fashion, but instead has chosen to compete on its own terms.
That has temporarily given the appearance that is neglecting to participate in expected behaviors as mentioned above, but in fact, once the smoke clears, it's going to be clear and visible to the market that Aurora has separated itself from the pack.
In the near term it'll continue to generate significant revenue from recreational cannabis, and an increasing amount from vapes and CBD-based products.
But the long-term value of Aurora will be in its international expansion, where it has a presence in 24 countries and is scaling out its medical cannabis business.
In the near future Aurora is going to have an enormous amount of flexibility because of its huge amount of cannabis inventory. It'll be able to not only meet all its obligations and expectations for customers, but also have more than enough for research and development, and any amount of extraction it may need to perform in order to allocate cannabis inventory to various segments of the market based upon demand.
With that in mind, I'm looking for Aurora to jump between 40 to 50 percent from where it's trading now.
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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