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Why Aurora Cannabis Stock Could Break Out From Its Trading Range

Chris Lau

Since Aurora Cannabis  (NYSE: ACB) stock surged in March, ACB stock has been stuck in a narrow trading range between $8.00 and $9.00. Had the markets not sold off due to U.S.-China trade tension worries, Aurora stock would probably not have fallen to $8.38 recently.

marijuana cannabis

But it was reported that  cannabis sales in Canada had been unchanged over a three-month period.  That should not sit well with the owners of ACB stock.

Cannabis Sales Flat

Statistics Canada reported that cannabis sales in January and February were $79 million, flat from September and October 2018. And the 15,000 kilograms of production during that period, down from 22,000 kilograms in the December quarter, should dishearten those owners of ACB stock who expected growth of at least 10%.

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Aurora Cannabis should get singled out because the company has announced that it will significantly increase its production capacity between now and mid-2020. Aurora expects its production to soon reach 150,000 kg/year, up from 150,000 kg/year in 2018. By mid -2020, it expects its output to surge five-fold to 500,000 kg/year.

Low Production Costs

Aurora has touted its unique cultivation process that it says delivers mass scale, high quality and low production. Yet if cannabis demand is weak in Canada,the owners of  ACB stock  cannot be sure that global demand for cannabis is growing.

In the second quarter, Aurora reported net revenue of $54.2 million. The company’s revenue grew 83% quarter-over-quarter. But Aurora stock has  an $8 billion market cap, and ACB stock has a price/sales ratio of around 20 times. To retain that high multiple, Aurora must continue reporting strong growth for several quarters. As long as Aurora keeps bringing new product to market, it should have no trouble growing sales and its patient base. (It had a patient base of 73,000 in Q2).

$200 Billion Addressable Market

Aurora believes the addressable market for medical and global adult-use cannabis is $200 billion. But some may worry that the weak Canadian data indicates that the targeted global market size may not materialize ever or at least for some time. Still, cannabis has the potential to disrupt many markets, including beverages, pharmaceuticals, and  tobacco.

It is not surprising that Altria (NYSE: MO) invested CAD $2.4 billion (USD $1.78 billion) in Cronos Group (NASDAQ: CRON) last December. That investment lifted the valuations of nearly all cannabis stocks, including ACB stock. So, as cannabis companies report their quarterly earnings, the owners of Aurora stock will look for proof that growth is still in the cards for the cannabis sector.

High Expectations for Aurora

Aurora reported that its revenue had soared 260% in the second quarter, while its average selling price came in at $8.39. But it reported a net loss of CAD $158.3 million (USD $117 million).

Though the number of the company’s registered medical patients grew 69% to 77,136, the company still lost money.  But as Aurora leverages its R&D efforts to develop high-margin products, it will be profitable sooner than most think. That should be a positive catalyst for ACB stock.

The Bottom Line on ACB Stock

Aurora  Cannabis stock is at a crossroads. Aurora stock may drift lower if markets grow wary of cannabis stocks. Conversely, strong revenue growth could lift Aurora Cannabis stock back to the $9 – $10 range.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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