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The Growing Pains at Aurora Cannabis (ACB) Are Real, But the Potential Is Undeniable

Aurora Cannabis (ACB) Chief Corporate Officer Cam Battley told Marijuana Business Daily in a recent phone interview that the company was focused on entering the U.S. CBD market in the near future.

Within a couple of quarters the company is going to catapult far beyond all of its competitors in relationship to production capacity. It's expected to produce over 625,000 kilograms annually by early 2020.

Considering the slow licensing process in Canada concerning retail outlets, and its current shortage of GMP compliant cannabis to sell to overseas market, the company will need to find more outlets for its growing amount of product.

Meanwhile, ACB has a cautiously optimistic Moderate Buy consensus rating from the Street. This breaks down into 4 'buy', 5 'hold' and 1 'sell' ratings in the last three months. We can also see from TipRanks that the average analyst price target is $8.07 - 45% upside from the current share price. (See ACB's price targets and analyst ratings on TipRanks)

Canadian cannabis demand

Some have drawn the wrong conclusion concerning cannabis demand in Canada, saying supply is already outpacing demand, but that's simply not true at this time.

The reality is demand remains robust, and the lack of retail outlets to sell cannabis through is what has been limiting potential sales for Aurora and other suppliers in the country.

While that is slowly starting to improve, it's going to take a lot longer for the full potential to be realized. The legalizing of derivatives will help, but that won't have an impact until the first quarter of 2020, and it remains to be seen how much current sales will be cannibalized by higher-margin and more desirable derivative sales.

However it works out, it should result in improvement in the top and bottom lines of the company. That will also be leveraged by the increase in the number of stores cannabis can be bought in.

European Union Good Manufacturing Practice (GMP) certifications

In a few weeks Aurora stated it will have two more GMP certifications in Canada. That will provide more product that can be sold in international markets requiring compliance to those standards.

As mentioned above, global sales have been more modest than expected because of the shortage of medical cannabis that meet GMP standards.

The two new facilities – Aurora Vie and Aurora River – will add a combined annual production capacity of GMP-compliant medical cannabis of about 32,000 kilograms. This will go a long way to boosting sales in global markets.

It will eat up some of the vast supply becoming available in 2020.

The U.S. market

A number of analysts and investors have been waiting to see what Aurora is going to do in the U.S. market after it hinted at some significant moves a couple of quarters ago.

Cam Battley said this:

“What I do expect is within a very short period of time we’ll be entering into the U.S. with another point of entry, and a significant one.

“We’re learning what the strengths and weaknesses are of (multistate operators) and other business models, so we are definitely laser-focused, short term, on CBD derived from hemp, because that can be done now. It’s fully permissible now."

At this time I don't see Aurora being at any competitive disadvantage, as the CBD market in the U.S. is highly commoditized at this time, and any move it makes to differentiate with strong partners could position it for strong sales growth under the right conditions.

One concern I do have is what Battley said concerning entering the U.S. in a similar way Canopy Growth did with Acreage Holdings. In my view that would be a huge mistake.

I wouldn't have a problem with that if it did so solely with CBD, but if it goes beyond that based upon the assumption the U.S. will sometime soon legalize cannabis at the federal level, it could be disastrous over the long term. The reason why is it would lock up capital that may never experience a return on investment

My view based upon researching the political sentiment in the U.S. is, there is no consensus or political will to make legalizing pot a priority. Not only that, there is legitimate opposition at high levels which isn't going to go away anytime soon.

But if Aurora lands a deal or deals with some large companies based in the U.S. in regard to CBD, it's going to increase sales for Aurora at meaningful levels. It will also provide an outlet for its huge supply coming in 2020.

Conclusion

Aurora is now in a race between the increase in supply levels and various outlets to sale its product in. I think Canada, even though extremely slow in licensing retail outlets, will increase enough where a lot of Aurora's excess supply will be sold in that market.

Europe, while a great long-term market, will be even slower because of the availability of GMP-compliant cannabis taking time to grow.

That means it's going to be very important for Aurora to find alternative markets to compete in, and there is none larger than the U.S. cannabis market.

I don't see any oversupply issues for Aurora over the next three quarters, but in the second half of 2020 it could start to become an issue if growth in Canada and Europe is slower than expected, and it takes awhile for Aurora to land a good deal with a U.S.-based company.

Many good things are in store for Aurora Cannabis, but in the near term there will be some growing pains because of some of the things it has no control over, and finding a deal with an American company that makes sense within its stated strategy of not giving up control to secure investment from larger companies such as Canopy Growth did with Constellation Brands.

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