Aurora Canncbabis (NYSE:ACB) stock traded higher in mid-May after the Canadian cannabis giant reported third-quarter numbers that, while short of expectations, broadly confirmed that ACB is benefiting from favorable underlying trends. Investors cheered the favorable results, and ACB stock traded slightly higher in response to the report.
Context is important in this case. Many expected Aurora’s third-quarter numbers to be pretty bad. There was an overwhelming amount of data which suggested that the Canadian cannabis market had flat-lined in the early parts of 2019. Consequently, expectations were low heading into the print.
But Aurora didn’t report bad third-quarter numbers. Instead, Aurora reported pretty good third -quarter results. Across the board, everything from revenues to volumes to margins improved sequentially, implying that while the Canadian cannabis market may have flat-lined in early 2019, Aurora did not.
That’s bullish for ACB stock. For a long time, Aurora stock has been the most undervalued big name Canadian pot stock. Two things have held it back. Specifically, concerns that its current leadership position in the Canadian cannabis market is slipping and the fact that the company doesn’t have a big-time investment from a consumer-staples giant.
The first of those concerns was addressed by the company’s strong third-quarter numbers. The second concern should be addressed later this year. As a result, now seems like a good time to get bullish on ACB stock, since the relative valuation discount of Aurora Cannabis stock won’t last forever.
Aurora Reported Strong Numbers
From head to toe, Aurora’s third-quarter earnings report was pretty good. Despite the headline misses, every single metric rapidly moved in the right direction for Aurora. This confirms that Aurora is not only a leader in the Canadian cannabis market, but also that it’s widening its lead.
Its total revenues rose 21% sequentially, as its revenue from consumers surged 37% quarter-over-quarter and its medical revenue increased 8%. Meanwhile, the number of kilograms of cannabis that it produced rose nearly 100% quarter-over-quarter, while the number of kilograms it sold rose over 40%. Production cost per gram of cannabis dropped more than 25% quarter-over-quarter, and its gross margins rose four points sequentially.
Across the board, Aurora’s operations improved from late 2018 to early 2019. In the wake of murmurs that the Canadian cannabis market was flat during that stretch and the muted growth numbers Cronos (NASDAQ:CRON) reported not too long ago, it’s clear that Aurora is accelerating its leadership position in the Canadian cannabis market.
This acceleration of leadership, coupled with the large investment that the company should receive soon, pave the path for ACB stock to head way higher in 2019.
Aurora Stock Can Rise Meaningfully
The relative undervaluation of ACB stock, which won’t last too long, creates a compelling opportunity for investors in 2019.
The market currently values each kilogram of cannabis that Tilray (NASDAQ:TLRY) and Canopy (NYSE:CGC) sold last quarter at about $1.5 million. The market simultaneously values each kilogram of cannabis that Cronos sold last quarter at more than $4.5 million. But when it comes to Aurora, the market thinks each kilogram of cannabis sold last quarter is worth less than $1 million.
The disparity has nothing to do with growth. Aurora’s revenues, production capacity, and sales volumes are growing as quickly as anyone else’s in the industry. It has nothing to do with size, either, as Aurora is the second-biggest player in the market behind Canopy. Nor does it have anything to do with profitability, as Aurora has one of the highest gross margins in the sector.
Instead, it has everything to do with two things. First, investors question the longevity and sustainability of Aurora’s current leadership position. Second, investors question how Aurora can compete with companies that have received billion-dollar investments from consumer-staples giants.
The first concern was addressed by ACB’s strong third-quarter numbers. The second concern will be addressed later this year. Aurora didn’t receive a large investment like Canopy or Cronos, yet But, considering this company continues to expand its production footprint and leadership position, and that ACB stock trades at a huge discount to its peers, it’s only a matter of time before some big consumer-staples giant steps in and pours in a few billion dollars.
Once that happens, there will be no reason for ACB stock to trade at a lower valuation than other major marijuana stocks. The discrepancy will go away, and as it does, Aurora Cannabis stock will fly higher.
The Bottom Line on ACB Stock
Aurora’s third-quarter numbers were actually much better than most expected, and imply that Aurora is extending its leadership position in the Canadian cannabis market. The longer its position in the market improves, the higher the odds that the company will receive a huge investment from a consumer-staples giant. The higher those odds go, the higher ACB stock will go.
As of this writing, Luke Lango was long ACB and CGC.
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