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Can Canadian Derivatives Boost Aurora Cannabis (ACB) Stock in the Short Term?

Aurora Cannabis (ACB – Get Report) has been taking a beating lately, partly from the increasing negative sentiment concerning the cannabis sector itself, and also partially from its failure to meet expectations that the company had optimistically guided for.

Its share price dropped to under $5 recently, making one wonder how low was it going to go.

While the near term performance of the company is likely to remain modest, over the long term I see nothing to point to the bottom falling out from under it at some fundamental level.

Aurora has all the pieces in place for a long-term upward run, as it has made most of its major acquisitions for now, and should be able to allocate capital to segments of the company that will generate growth while lowering costs per gram.

We all know the adage that when investors are fearful it's time to buy, or to put it another way: when there's blood in the streets, it's definitely a buying opportunity.

My belief at this time is Aurora Cannabis isn't going to drop a lot further, but even if it does, it's a great entry point for those looking to hold for the long term, and/or add to their position in the company.

According to Canaccord analyst Matt Bottomley, Aurora stock can double over the next 12 months, as he rates the stock a Speculative Buy with a C$13.50 price target. (To watch Bottomley's track record, click here)

Canadian derivatives

In October, Canada is going to allow cannabis companies to offer derivatives to their customer bases, and that should go into practical effect in the latter couple of weeks in December.

With that in mind, we aren't going to know what the impact it'll have on Aurora and other companies until after the first calendar year earnings report, as that'll be the first full quarter after being approved.

Even then the results may not be full, depending on how long Aurora will take to have a full line of products ready.

What's important in the short and long term is Aurora continues to slash it cost per gram, and with a line of products that command wider margins and better earnings results, this should be a strong catalyst for the company. That's especially important because the company and the market looking for the company to produce positive EBITDA in the latest quarter, but it failed to do so, resulting in its share price collapsing.

Near-term outlook

Aurora's chief corporate officer, Cam Battley, said in its latest earnings call that the company was probably going to go through "a bit of a plateau" concerning recreational pot sales. I think that's a reference to the slow process of approving retail license by Health Canada; something out of the control of the company. That's starting to gradually improve, but it's far behind where it should be.

Even though it isn't the fault of the company, it does have to be factored into its overall performance until those issues are resolved.

While that's happening, Aurora will lean upon the derivative market and its medical sales.

Concerning its medical sales, that should improve in the near term because of the completion of a couple of facilities that are EU GMP compliant. Aurora's sales have been more modest than anticipated because of a lack of supply for that important market. The EU, and Germany in particular, command higher prices and wider margins, so when it has more cannabis to supply that demand, it's going to get far better results from its international performance.

Conclusion

Contrary to some reports I've seen, there is no oversupply in the cannabis market at this time. Most if it has to do with regulatory compliance, such as in the case of packaging in Canada, or the extremely slow pace in getting more retail outlets license and operational.

Once those things improve, Aurora is selling derivatives in the Canadian market, and it has its GMP compliant facilities producing much more cannabis for the European market, Aurora is going to take off.

When that happens, it not only will be generating much more sales, but will do so with a lot better portfolio mix that will accelerate its path to profitability. It's already not too far from that happening as the company stands today.

Nothing has really happened to change the narrative for Aurora except that it's going to take a little longer than expected to increase sales and earnings. For that reason I see this as a great entry point. It could drop further, but that should be a reason to add even more shares. Aurora is going to make shareholders a lot of money in the future, and those with a long-term horizon will enjoy the ride.

Canadian derivatives will be an important part of its success.

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Disclosure: The author is Long ACB