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Will Aurora Cannabis Earnings Live Up to the Hype?

Dan Caplinger, The Motley Fool

After a tough end to 2018, marijuana stocks have produced huge gains to start the new year. Even with a gain of 55% in the first five weeks of 2019, Aurora Cannabis (NYSE: ACB) isn't the top performer in the cannabis market, but many see it as having one of the best opportunities to become the leader of the budding marijuana industry.

Aurora Cannabis will release its fiscal second-quarter financial results after the market closes on Monday, Feb. 11, and investors are hoping that the cannabis company will be able to show an impressive run-up in revenue. Yet the company has already weighed in with some preliminary results, and they weren't entirely positive -- casting some doubt on just how well Aurora will do in standing up to the marijuana investing hype.

Stats on Aurora Cannabis

Metric

Current Stat

EPS estimate

(CA$0.06)

Last quarter's EPS

CA$0.12

Revenue estimate

CA$51.8 million

Change from last quarter's revenue

75%

Data source: S&P Global Market Intelligence. Last quarter refers to fiscal first quarter of 2019.

Can Aurora keep up its momentum?

Investors have high hopes that Aurora Cannabis can keep up its positive momentum from recent periods. In the first quarter of fiscal 2019, Aurora managed to produce sequential revenue growth of 55%, coming in at CA$29.7 million. That number was more than triple what Aurora had in sales during the year-earlier quarter, showing the steep growth trajectory that the cannabis company has been able to produce in a short period. More importantly for many investors, the fact that Aurora was able to show a profit was a good sign for the emerging industry -- although there were numerous ways in which the company was able to produce bottom-line gains that partially hid the extensive costs that it continues to incur in its growth efforts.

Yet Aurora Cannabis has already given investors some cause for concern coming into its February report, releasing preliminary numbers for the fiscal second quarter that suggest weaker performance than some had hoped to see. Back in January, Aurora said that revenue would come in between CA$50 million and CA$55 million for the quarter, which was far less than more optimistic shareholders had been looking to see. At the time, consensus forecasts had projections of anywhere from CA$60 million to CA$75 million.

Aurora borealis with the Aurora logo and slogan superimposed.

Image source: Aurora Cannabis.

The primary problem is a major disconnect between the expectations that investors have for developments in the Canadian recreational cannabis market and the reality of the situation. Despite having had advance notice of the size of the opportunity in Canada, Aurora and other producers weren't able to line up capacity increases quickly enough to be ready for the rollout. At the same time, the market infrastructure for actually making sales of recreational cannabis products wasn't entirely in place, especially in some key provincial markets within Canada. Meanwhile, regulators have been overwhelmed with the number of companies seeking to get into the marijuana business, and issuance of required permits and licenses has slowed to a crawl, holding up key projects for expansion across the industry.

Can Aurora be the winner?

A big question Aurora Cannabis will have to answer is whether it can come up with a stronger strategy for expansion. Many investors are drawing uncomfortable comparisons between Aurora and Canopy Growth (NYSE: CGC), as Canopy has chosen to make organic investments in capacity expansion that have generated considerable excitement within its investor base. In particular, the decision to spend $150 million on a hemp production facility in upstate New York could pave the way for Canopy to gain a foothold in the U.S. market. If legalization efforts go forward across the U.S., then that move could prove prescient for Canopy.

In the meantime, Aurora has continued to make acquisitions that raise concerns that it's paying too much for growth. For example, the purchase of privately held Whistler Medical Marijuana could involve payments of as much as CA$175 million, but Whistler has only minimal current production capacity. Despite currently profitable operations and a reputation for premium-quality products, Whistler won't necessarily add to Aurora's long-term growth. The fact that Aurora continues to issue shares as payment for acquisitions has also forced longtime shareholders to suffer from dilution.

What Aurora has to do

In order to reassure investors that the marijuana company remains on the right trajectory, Aurora Cannabis will have to demonstrate an ability to recognize the downsides of its past strategic moves and come up with alternatives that will work more effectively in the future. If it can pull that off, then Aurora will fully justify the share-price gains it's enjoyed in 2019 and could easily add to them as the cannabis industry grows in the future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.