Aurora Cannabis Stock: Love It or Leave It?

Canadian marijuana company Aurora Cannabis (NYSE:ACB) had a dreadful 2019; its stock lost 56% of its value over the year, compared with a 36% decline in the industry benchmark Horizons Marijuana Life Sciences ETF. External headwinds in Canada, along with Aurora’s own haphazard acquisitions, dragged down revenue and made profit challenging, while expenses kept piling up. All these factors led to its decline, and hopes of the company recovering anytime soon were minimal.

Hence, its third-quarter results at the end of March came as a pleasant surprise. The company reported a surge in revenue — to be precise, a year-over-year jump of 35% to 75.5 million Canadian dollars. Aurora gave a sneak peek into its fourth-quarter results on Sept. 8 when it discussed some impairment charges and a decline in revenue. But investors hoped to get some good news from the actual results, and the stock was up 16% in anticipation on Sept. 22. When the company released results the same day after market close, though, the picture wasn’t rosy. Let’s see whether there was anything to like in Aurora’s Q4 results. 

Cannabis plant growing outdoors.

Image source: Getty Images.

Revenue results were worrisome

As management stated in the preliminary results, net revenue fell within the estimated range, hitting CA$72.1 million, but declined year-over-year from CA$94.6 million. Sequentially, revenue also dropped 5% from the third quarter of 2020.

The company saw a 9% decline in consumer cannabis revenue from the prior quarter, to CA$35.3 million. However, medical cannabis revenue jumped 4% sequentially to CA$32.2 million, thanks to the company’s Canadian medical business and revenue from Europe.

Though Aurora didn’t discuss losses in the preliminary results, investors weren’t surprised to see a Q4 net loss of CA$3.3 billion from continuing operations. In the year-ago quarter, the marijuana company recorded a net loss of just CA$300 million. Aurora hasn’t hit profitability yet as its revenue growth hasn’t been sufficient to turn to profits, while expenses have been rising.

Its guidance for revenue for Q1 2021 only includes cannabis sales, as it divested most of its non-core subsidiaries in fiscal 2020 as part of its “facility rationalization” plan announced in June. Aurora now expects cannabis net revenue to be in the range of CA$60 million to CA$64 million in Q1, lower than its Q4 numbers. According to the company’s press release, the gross margin could be in the range of 46% to 50%, while selling, general and administrative costs (SG&A), including research and development, could be lower — say, in the $40 million range.

Was it all bad news?

It appears the company’s efforts to reduce SG&A expenses through its business-transformation plan is working. Some good news in the Q4 results included the decline in SG&A expenses to CA$67.7 million from CA$73 million in the year-ago quarter. This was the probable reason for the negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) results this quarter.

Aurora reported an adjusted EBITDA loss of CA$34.6 million, an improvement over Q3’s loss of CA$50.4 million. However, this doesn’t guarantee the company will be able to achieve management’s target of positive EBITDA by the second quarter of fiscal 2021. Meeting that goal will depend entirely on how its cannabis products drive revenue in the coming months and whether it continues to reduce its expenses. (Investors should hope for continuing positive EBITDA, as it’s a clue to management’s skill at handling its operating expenses.)

The pot producer also managed to reduce its capital expenditures to CA$16.4 million from a whopping CA$74 million in Q3; that’s a good sign. And it was able to improve its financial flexibility through credit-facility amendments. Its “facility rationalizations” and cost-reduction plans could help it lower costs by up to CA$10 million per quarter starting in the second half of fiscal 2021. But it has a long road ahead before it actually makes a profit.

Neon signs of Yes and No.

Image source: Getty Images.

Should you hold on or give up?

As I’ve previously mentioned, investors shouldn’t buy Aurora unless and until management provides some update on its cannabis-derivatives products, which we expected — but largely did not receive — in its Q4 results. CEO Miguel Martin acknowledged that the company has dropped “from its top position in [the] Canadian consumer” market, and a return to that status would represent a huge opportunity for Aurora now that cannabis derivatives are legal. (Canada legalized derivatives — vapes, edibles, concentrates, beverages, and more — in October 2019.)

Martin stated that Aurora will now reposition the Canadian consumer business by focusing on emerging-growth formats that include vapes, pre-rolls, concentrates, and edibles. The company disclosed no further information on any product launch. Instead, Aurora’s revenue guidance looks bleak for the first quarter of fiscal 2021.

This forecast is understandable; a company that’s shutting down facilities and cutting costs to reduce expenses can’t be spending money on new product launches to juice revenue growth. Then again, revenue growth is the only way for Aurora to regain its position in the cannabis space. Peers like Canopy Growth (NYSE:CGC) have already launched a variety of cannabis-infused chocolates, beverages, and vape products; Canopy’s offerings debuted in May and have already brought the company a sizable amount of revenue. Meanwhile, Aphria (NASDAQ:APHA) also has a number of innovative cannabis derivatives in its pipeline. 

So far this year, shares of Aurora have sunk by 80%, worse than the 35% decline in the Horizons Marijuana Life Sciences ETF. Canopy’s and Aphria’s stock prices have also slumped by 33% and 19%, respectively, over the same period.

ACB Chart

ACB data by YCharts

Investors anticipating a ray of hope were utterly disappointed with Aurora’s quarterly results. For the time being, there isn’t much to love about this marijuana stock, as dark clouds still loom over it. This is one to avoid. 

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