It's hard to believe Aurora Cannabis (NASDAQ: ACB) stock was once trading above $150 a share. Today ACB languishes below $2, and investors are worn out from a slew of false hopes and disappointments.
Nevertheless, Aurora Cannabis remains a significant player in the Canadian marijuana market. It also has a growing presence in Europe and the US.
Between March 2019 and May 2020, the Aurora Cannabis stock price collapsed by over 93%.
When Miguel Martin stepped in as CEO in September 2020, the ACB share price stood around $7. Since then, it's fallen to $1.37 at the time of writing. It's fair to say the company is a shell of what it once was. Nevertheless, Aurora Cannabis still stands and has the ambition to return to its former glory.
What is Aurora Cannabis?
Aurora Cannabis Inc (NASDAQ: ACB) is a producer and distributor of cannabis products.
The company operates a global medical marijuana business and is extending its international footprint. Aurora Cannabis stock currently sells medical cannabis products in seven EU countries Germany, Malta, Poland, Czech Republic, UK, Denmark, and France. ACB is either the market leader or in the top three in all those countries.
The company was founded by Terry Booth and Steve Dobler on December 21, 2006, and is headquartered in Edmonton, Canada.
What is Occo?
Occo is Aurora Cannabis's science and innovation business. It has one of the largest catalogs of high-quality genetics, IP and biosynthesis available for licensing. The aim is to use genetics, science, and breeding to create the best cannabis in the world.
Miguel Martin, CEO & Director, Aurora Cannabis, Inc., says:
Occo represents a capital-light, long-term revenue growth opportunity that we believe makes Aurora unique and can drive success by enabling our licensing partners to deliver a continuous stream of new cannabis to the market.
How Does Aurora Cannabis Make Money?
Aurora Cannabis makes money from selling its range of products, including dried flowers, pre-rolls, vapes, and concentrates.
Price pressures on its consumer cannabis segment have dragged on revenue in the past year, but the company is focusing on its premium brands with wider margins, which is beginning to pay off.
Aurora recently completed the acquisition of Thrive Cannabis, which is a licensed producer of super-premium cannabis concentrates and craft dried flowers. Thrive is best known for its flagship recreational brand, Greybeard Cannabis.
Management at Aurora has said it will put the Thrive team in charge of its Canadian recreational cannabis portfolio to help push its premium consumer offerings.
However, Aurora mainly focuses on attracting the insured medical patient population to improve its bottom line.
In Q3, insured patients made up 79% of Aurora's domestic medical sales, up from 73% in Q2. Meanwhile, medical sales represented around 78% of Aurora Cannabis stock's Q3 revenue and almost 90% of its total Q3 gross profit.
Aurora has a competitive advantage in serving the Canadian medical market, and its direct-to-consumer approach helps drive its industry-leading margins. Here, the company strives to provide an all-round service through its patient, clinician, and physician offerings.
Aurora Cannabis Stock Financials
ACB stock has a price-to-book value (P/BV) of 0.4, close to the industry average of 0.3. Aurora Cannabis stock does not come with a shareholder dividend.
During Q3, Aurora's net cannabis revenue came in at CA$50.4m, down -16.8% from CA$60.6m in Q2 and -9% Y/Y. Variable shipment sizes to Israel, competition and store closures contributed to this revenue decline.
Aurora expects to reduce operating expenses below CA$30 million on a quarterly basis as it accelerates its cost-cutting plans. In June, Aurora Cannabis announced it would be laying off 12% of its workforce amid a company-wide reorganization.
The restructuring includes closing facilities that are bigger than necessary, with overheads that it can no longer justify. Aurora Sky was pitched to be the largest marijuana production facility in the world upon completion, so it's sad to see it shutter, but a necessary move to reach profitability. Indeed, closing its Aurora Sky facility will save the company around CA$7m a quarter.
Aurora's global medical cannabis business boasts margins exceeding 60%. This is a stable and predictable side of the company, which is actively growing worldwide.
The company is confident it can reach a profitable adjusted EBITDA run rate by the first half of fiscal 2023. This is partly thanks to its wide margins in medical revenue and its cost-cutting program.
ACB Growth Potential
Aurora believes that the cannabis growth story over the next several years will center on international medical and recreational approval.
Germany's health and finance ministers have recently indicated they'd like to accelerate adult use legalization of cannabis. As Aurora Cannabis is already established in the country, this could give it a significant advantage when such a ruling comes to pass.
This is undoubtedly good news for the company, and something it is hopeful will lead the way for other European countries to follow.
Aurora is in touch with the German regulators and believes it is well placed to take a head start on recreational production when the time comes. However, Germany does have stricter compliance than Canada. For instance, its deviation provision on product potency is only 10%. Most places in the world allow a 20% deviation to label. This poses a challenge to the assortment of products that Aurora Cannabis stock can distribute and sell.
But this is a consideration for any company operating there.
The EU cannabis market is expected to be worth CA$6bn by 2025. Aurora expects to grab a sizeable market share given its regulatory expertise, compliance protocols, testing, and science.
Aurora's growth strategy includes M&A and regular product innovation.
In the past, Aurora has been criticized for being slow to market cannabis derivatives such as vapes, edibles, drinks etc. These usually come with higher margins than the core cannabis products but also cost a fortune to develop and market. The company is hoping to rectify this with its latest acquisition.
The company recently acquired TerraFarma (Thrive Cannabis) and is looking for more strategic acquisitions to help grow its margins and footprint.
Furthermore, from April to July 2022, the company planned to launch 40 new products to benefit recreational and medical channels. These include its first infused pre-rolls and hash offerings, brand new cultivars from its breeding program, and an assortment of new vape edible and concentrated flavors.
Aurora Cannabis Stock Risks
The primary risk to investors is further share placings, which lead to stock price dilution.
A recession may not necessarily be bad for the stock, as smoking and recreational escapism tend to be in higher demand when the world is depressed. However, inflation cuts into the company's profit margins and competition remains fierce.
Aurora Cannabis stock has undoubtedly lost market share to competitors. However, the company claims to be the number one Canadian LP in terms of medical cannabis revenue over the last 12 months.
Should You Invest in Aurora Cannabis Stock?
Cannabis stocks struggled in 2021 after a bountiful 2020. But Aurora Cannabis stock has been on a downward trajectory since March 2019. Investors have lost faith, and the initial hope that the Biden Administration would achieve federal legalization in the US has returned to the backburner.
Canadian MJ stocks have been battered harder than their US counterparts as it's a more competitive space with oversupply and price pressure evident.
For Aurora, its medical segment offers a defensive and stable revenue stream, which serves as the company's backbone.
Aurora estimates there are currently around 150,000 patients in the EU, where it has high hopes for expansion. If the EU reaches similar adoption levels to Canada, i.e., 1% of the population, the patient pool could expand to 3.5 million patients.
As of its May fiscal Q3 earnings call, Aurora Cannabis had CA$283m in cash (including an early repurchase of CA$141 in convertible debt) and $190m under its at-the-market (ATM) program. While this gives the business cash, it's helped dilute Aurora's stock price.
The company claims to have a strong balance sheet and is looking for more M&A opportunities to strengthen its competitive edge.
However, it also has a shelf prospectus earmarked for this purpose. This means Aurora can offer securities quickly when funds are needed or when market conditions are more favorable. However, this would cause further share price dilution.
Analyst Pablo Zuanic at Cantor Fitzgerald put a Buy rating on Aurora in June with an ACB share price target of $3.12. But Vivien Azer at Cowen & Co and Tamy Chen at BMO Capital Markets struck a Hold rating while revising their share price targets down.
For investors who believe in Aurora's ability to make waves in Europe, there is still hope that the ACB share price can revive. But it will have to regain investor trust and prove its streamlining efforts and acquisition strategy can restore confidence in Aurora Cannabis stock.