With Aurora Cannabis (ACB) ready to report first quarter results after the closing bell on Thursday, November 14th, the question arises as to whether or not the company will show signs of strength in the near term, or it'll report numbers that aren't inspiring at this season of time in its progress.
In this article we'll look at why investors and/or shareholders need to temper their expectations for Aurora in the near term, and why the long-term outlook remains strong.
In the short term I don't see any significant positive catalysts that will drive the share price of the company up. The two major factors that are out of the company's control, which will be major growth engines for the company in the months and years ahead, are outside of its control; I'm talking about the slow retail licensing process in Canada and the legalization of derivatives in the country.
Even though derivatives have now been legalized in Canada, they won't be able to be sold until the end of December, meaning it won't have any significant impact on the performance of Aurora until after the first full calendar quarter of 2020. Even then it's probable Aurora could take until the second full quarter before it has enough products released to consumers in order to generate revenue that enhances its revenue and earnings performance.
The good news here over the longer term is when its higher margin derivative products are rolled out, it should generate better numbers from recreational pot, while its healthy and growing medical cannabis business continues to grow.
While this is happening, the number of retail outlets in Canada will continue to grow, allowing it to scale further in conjunction with that pace of growth.
I'm expecting the number of retail outlets in Canada to consistently growth, but it remains to be seen how rapidly the pace will pick up. Either way, derivatives and the growing number of retail stores will be positive growth catalysts for Aurora in the months and years ahead.
Also important to consider is most, if not all of this, is already priced into its share price, so even incremental improvements will boost its share price going forward.
The problem with Aurora Cannabis, as with other cannabis companies that enjoyed soaring growth over the last couple of years, is it wildly raised investors' expectations concerning the company, and when the inevitable correction occurred, the obvious result was the robust value of the company got hammered.
Even though the company could fall further based upon its upcoming earnings report, and possibly the one after that if it takes longer than expected for derivative sales to grow at meaningful levels and retail stores to be operational.
There's no doubt the company is going to turn around and return to steady growth, it's only a matter of when.
With that in mind, I wouldn't be too excited about this earnings report and the one following it, which will report the results as of the end of March 2020.
Also, I wouldn't be too concerned about the volatility of the share price of Aurora over the next four or five months. That's true whether it gets a good boost from a surprisingly good performance, or it is less than impressive during that time.
C$12.00 Price Target
Aurora stock hasn't had a great year, with shares falling 33% since the start of 2019. But things aren’t as bad as they may seem, argues Cowen analyst Vivien Azer.
"We remain encouraged by the company's scale and ability to generate low-cost production with strong gross margins," said Azer, as she reiterates an Outperform rating on ACB along with a 12-month price target of C$12.00, which implies about 160% upside from current levels. (To watch Azer's track record, click here)
The long-term narrative of Aurora Cannabis remains in play, and it's a positive one. The share price of the company is at a good price point now, and even it if falls lower than it is, it will generate good returns for shareholders over time.
I don't foresee the company starting to level off until the numbers come in after its third fiscal quarter report from the quarter ending on June 30, 2020. At that time it'll have had two quarters of earnings reports including derivatives, and a lot more retail stores opened in Canada.
At that time we'll know better what the pace of growth will be, and how the company has handled the derivative market, as it takes charge of its own destiny after the beginning of the new year in that market segment.
Either way, I don't see Aurora Cannabis remaining subdued for a prolonged period of time. The second half of 2020 should be a good one for the company, and even if it isn't robust, at this price point it should still generate solid numbers for shareholders.
The bottom line is over the next couple of quarters shareholders and investors shouldn't expect too much. There's a legitimate chance the company could surprise to the upside, albeit if it does, I don't see it being at a level that would drive share price up in a sustainable way.
After the second calendar quarter of 2020, I see the strong probability that market sentiment will justifiably improve, based upon a clearer picture of its potential pace of growth.
To find good ideas for cannabis stocks trading at fair value or better, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.