Cannabis stocks keep getting hammered in what has been one of the worst sell-offs for the sector in the past two years. From speculative upstarts through to the industry leaders, everyone’s shares have been wilting. If anything is going to change the mood, however, it could be positive earnings. That seems to be the case with Aurora Cannabis (NYSE:ACB) whose shares popped more than 10% after it gave a sneak peek at its fourth quarter results on Aug. 6. ACB stock, overall, is up 5% this month, compared to a 2.1% gain in the pot-stock exchange-traded fund ETFMG Alternative Harvest ETF (NYSEArca:MJ).
The Aurora Cannabis preview of results due out on Sept. 15 finally gave investors a sign that at least one marijuana company is building a more sustainable business. In a world where rivals like Hexo (NYSE:HEXO) and Canopy Growth (NYSE:CGC) keep growing production capacity far in excess of demand while losses mount, Aurora may be set to buck the tide.
On Track to Profitability (Sort of)
In its preliminary Q4 results, Aurora surprised the market. It confirmed that production is strong, near the high end of its range. That’s not so important though, as there isn’t demand for as much marijuana as Aurora is producing. What is important, however, is that Aurora generated more revenue than analysts had expected. This speaks to some combination of either higher profit margins than anticipated, or more sales volume. Either outcome, of course, is a plus for ACB stock.
All this adds up to Aurora being on pace to generate positive adjusted EBITDA for the fourth quarter, which is one type of profitability. But make no mistake, this is still not equal to net income. EBITDA is earnings before interest, taxes, depreciation, and amortization. It’s a big positive step for a marijuana company to achieve positive EBITDA. Most aren’t even close to it yet. But it’s another hurdle to get to profitability.
To be sure, Aurora does have plenty of those other costs. It has interest, for example, because it has quietly accumulated a rather sizable debt load. This has led analysts such as Christopher Carey of Bank of America to criticize ACB stock due to its balance sheet and cash burn. Aurora has also pumped out tons of new ACB stock shares to raise money. Its share count is up from around 400 million at the start of 2018 to a billion now. That’s some serious dilution. It’s a good sign that Aurora is reaching positive EBITDA, but it needs to get to positive net income as well sooner or later, or the share dilution will only get worse.
Italy Deal: A Plus, and a Minus
Recently, Aurora announced a deal to be the only official supplier to Agenzia Industrie Difesa, an agency of the Italian government. This agency will distribute medical marijuana around the country. Aurora anticipates finalizing the deal next month. Notably, Aurora competed against four other bidders for the contract, but was the only one that could meet all of the government’s requirements.
On the one hand, this deal is a clear positive for Aurora. It’s no secret that the Canadian marijuana market is sagging due to massive oversupply. Marijuana producers are all trying to become the biggest and most well-known as fast as possible. But the demand picture hasn’t nearly kept up with supply. Legalization didn’t unleash unlimited consumer interest.
So Aurora has validated its business model of focusing on the global market outside of just the U.S. and Canada. On the other hand, the Italy deal may be way too small to matter. Aurora’s contract authorizes it to distribute a minimum of 400 kilos of medical marijuana over the next two years. That’s a minimum, so it could be a lot more. But to put 400 kilos in two years in perspective, however, Aurora is now producing nearly 30,000 kilos of product per quarter. It will take a ton of 400 kilo-type deals to mop up that sort of supply.
ACB Stock Verdict
Initiatives such as the contract in Italy should help differentiate Aurora from its competition. So far, however, Aurora has not achieved that much with overseas dealings. It’s only managed $4 CAD million ($3.03 million) or so in quarterly revenues from outside of Canada so far, which puts international sales in the single digit percentage range of the company’s entire revenues.
At least for now, Aurora remains highly dependent on Canadian sales. And there simply aren’t enough consumers to achieve the ambitious growth goals that Aurora and its peers are pursuing within the Canadian market. If Canadian consumption doesn’t pick up quickly, other markets need to come online. Otherwise, the sector will keep trading lower.
ACB stock is positioned better than many of its peers, as the company’s preliminary Q4 numbers demonstrate. But it’s hard to get especially excited about any of these Canada-based marijuana stocks until the supply glut starts to reverse itself. Aurora looks better than many of its peers, but the sector is in trouble.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
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