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Aurora Cannabis: Pie In The Sky Targets

support@smarteranalyst.com (Ben Mahaney)

About every week an analyst comes out with pie in the sky market sizes for the cannabis market. A stock like Aurora Cannabis (ACB) is highly reliant on sales actually reaching these targets which has been problematic for the stock as actual Canadian sales have disappointed.

$200 Billion Market

According to Stifel, the cannabis sector offers a $200 billion global opportunity in a decade from now. The issue for cannabis stocks is getting access to this global market with limited recreational approvals around the globe.  The global market is mainly focused on Canada and parts of the U.S. and still faces a long path to fully open up global markets.

Analyst Andrew Carter predicts the Canadian market to reach C$10 billion in sales by 2023, yet the market is only on a pace for C$900 million in sales now. Even if edibles and vapes double the revenue potential in 2020, the market is only on a C$2 billion sales path.

The analyst has an interesting projection that the U.S. Federal laws won’t change until 2021 at beat. While this forecast isn’t a direct impact to Aurora Cannabis, it does prevent the Canadian giant from entering the U.S. cannabis market outside of CBD sales for several more years.

Global, Without the U.S.

Aurora Cannabis has always promoted the company has a global player in the cannabis sector. The problem is that the U.S. market dominates cannabis sales now and Canadian sales continue to struggle.

For FQ3, Aurora Cannabis only had sales of C$4 million outside of Canada. Dozens of U.S. companies already have sales far in excess of what Aurora does outside of Canada.

The company having facilities in 24 countries across 5 continents will actually turn into a massive dead weight, if sales don’t improve. Aurora Cannabis will need to justify why the company is in Estonia, Latvia, Poland and South Africa as examples with such limited international sales. The company doesn’t even breakout non-European dried cannabis sales despite listing activity in Australia, Brazil and Mexico amongst other countries.

The point here is that Aurora Cannabis expanded into all of these locations due to these pie-in-the-sky revenue targets that are highly unlikely to materialize in this time frame. Not to mention, the first mover advantage that the Canadian company covets will be lost when these markets don’t fully open for legalized pot use for years, if not decades.

The end result is that Aurora Cannabis has a market valuation of C$11 billion based on ~1.1 billion shares outstanding. In essence, the company has a market valuation in excess of the forecasted 2023 Canadian opportunity alone.

The company will naturally continue to grow medical cannabis outside of Canada, but the market potential still doesn’t match the stock price considering all of the competitors in Canada that will dilute the actual market opportunity. Even with 25% market share, Aurora Cannabis would be lucky to reach C$2.5 billion in sales by 2023.

Takeaway

The key investor takeaway is that Aurora Cannabis remains valued based on unrealistic market targets and global expansion that is far from certain. The stock will continue to struggle as the Canadian rollout disappoints and the stock is already valued based on cannabis sales hitting 2023 market targets that likely won’t reach targets.

To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.

Disclosure: No position.

 

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