Aurora Cannabis Down in the Dumps But Can it Recover?

Alex Cho

Alex Cho

CEO l Research Director

[email protected]

Jason Chen

Jason Chen

COO l Research Editor

[email protected]

Shakeel Stewart

Shakeel Stewart

Columnist and Author

Pot stock mania has fizzled though there is plenty to be optimistic about in the space. Aurora Cannabis (ACB) investors have weathered the recent onslaught of selling. Mostly owed to a difficult prior quarter earnings report, and also the emergence of a shelf offering that has positive implications for U.S. expansion, but requires significant dilution to reach that objective. Also, pot stock in general were elevated on M&A fueled speculation involving Aphria (APHA) and Tilray (TLRY), which has subsided.

U.S. Expansion versus Canadian and European Markets

However, aside from some hints at U.S. expansion from ACB, it’s becoming very apparent that the U.S. cannabis space has weathered the recent chat room fueled speculation in Canadian Pot stocks better. The key here however is that growth in the U.S. MSO (multi-state operator) space due to recreational weed legislation has limited financial implications for Canadian LPs (licensed producers) with the exception of Aphria perhaps, which managed to get in the U.S. space via a beverage deal.

We think this dynamic could play out more favorably if Aurora Cannabis could either gain market share from other Candian LPs or is able to report stronger growth in European markets. However, ACB has a terrible tendency of missing production goals, and has continued to scale back production from Canadian facilities, and reports also suggest Denmark (nordic) facilities have cut production. 

Without having an easy entry into U.S. markets. The situation has to turnaround for its pre-existing cultivation licenses, perhaps more aggressive promotional activity with lower pricing, and better production cost per KG could help improve the narrative. Alternatively, ACB could perform better if they yield higher THC concentrated flower, and could adjust pricing higher for top shelf flower.

Wall Street Expectations Are Extremely Low on the Stock

Most analysts have a negative rating on the stock, however there could be room for surprises for Aurora Cannabis as expectations have already diminished to a point where surprise demand growth, improved sales volumes, pricing per gram, or M&A announcements could drive sentiment back into the stock. 

Analyst consensus anticipates that Aurora Cannabis (ACB) will report dil. EPS of -0.21 CAD, and revenue of 71.74M CAD, for Q2’21, which translates to -5% y/y sales growth. In terms of earnings performance, ACB has missed earnings estimates for four consecutive quarters.

Investors probably won’t expect much of an earnings beat, but much of the weakness in terms of dil. EPS metrics ties into sales growth. Assuming ACB can return to sales growth, the dil. EPS metrics should see meaningful improvement, though it’s beyond the scope of this article to anticipate when pricing per gram/volume will normalize across its dispensaries.

Though, it’s broadly anticipated that the weakness in revenue for Q2’21 will be temporary and somewhat of a price recovery per gram, and demand/supply rebalance in the CAD LP space could translate into stronger revenue by Q3’21 where analyst forecast revenue of $77M, which implies 6.9% y/y revenue growth.

Investors may need to wait to find a better exit

Much of the bad has been priced into the stock with ACB trading at $9.14 in the United States. We think pot stocks are due for somewhat of a recovery, but more specifically ACB could perform better over the course of 2021. 

We think it’s too early to discount a recovery in the stock, and it’s too late to sell the stock to protect from further losses. At this point, investors will need to wait for better timing to look for an exit. But, news flow, and hype can move quickly through the pot stock space, and any number of positives for the industry could also impact ACB shareholders more favorably down the road as well.

Disclosure: Cho Research was not compensated to publish “Aurora Cannabis Down in the Dumps But Can it Recover?” Though Cho Research does use the research dollars it
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