With nothing more than a passing glance, marijuana company Aurora Cannabis (NYSE:ACB) doesn’t look terribly different than peers and rivals, like Tilray (NASDAQ:TLRY) or Canopy Growth (NYSE:CGC). Cannabis is cannabis. A closer, second look at the company, however, makes clear that an investment in ACB stock is considerably different than an investment in other marijuana stocks.
That’s by design, too, by the way. Aurora Cannabis is deliberately capitalizing on the opportunities others are overlooking, and skipping the more-crowded swathes of the market.
So far, it’s mattered little. The nascent industry is still just trying to navigate the cloud of smoke kicked up by Canada’s recent legalization of recreational marijuana; investors can’t see past that haze very well, either. The pot industry’s stocks have risen and fallen largely in unison.
What clarity has taken shape, however, reveals Aurora is on a distinctly different path. It may be a good enough reason to take a shot on Aurora Cannabis stock.
It’s All About Medical … and Europe
Aurora has always said its focus, even after Canada gave recreational weed the green light, would be on medical marijuana. It’s for the most part lived up to that promise, with roughly half of last quarter’s CAD $58.65 million ($43.65 million) worth of revenue being driven by sales of medical cannabis.
While not enough of a mix to make Aurora a pharmaceutical play, it does make it relatively unique among the biggest names in the business. Roughly 80% of Canopy Growth’s sales last quarter, for perspective were to adult recreational users. Also noteworthy is the fact that 10% of ACB’s last quarter’s business was driven by sales of services and products, rather than cannabis itself. And, nearly 20% of its dried cannabis sales was to European buyers.
They’re distinguishing factors the company has sought and hopes to enhance going forward.
“Let me start by telling you how much we love Europe,” said chief corporate officer Cam Battley in an interview following last quarter’s earnings call, going on to explain: “Europe is a market where there is very little competition, there’s only one producer in Europe right now. It’s one of eight that’s European Union GMP-certified … very limited competition, very limited supply.”
The best may be yet to come, however. CEO Terry Booth noted during the earnings call that Europe is “going nowhere but up, maybe not this quarter on the hockey stick — but we’ll start shipping to Europe in bulk before too long, we’re the first to sell high-value derivatives in Germany which are starting to get traction with the doctors … they still will take whatever we can give them.”
GMP Securities analyst Martin Landry is similarly stoked about the EU, writing of Aurora stock after its earnings release “With a presence in 24 countries and two facilities with an EU Good Manufacturing Practice certification, Aurora is well positioned to continue to grow its international sales and capitalize on the market opportunity which could dwarf the domestic market over time.”
Perhaps most telling — and shocking — of all? Booth was willing to concede if it were a “pure business decision 20 years in the future, at today’s prices, Aurora might stop selling recreational pot in Canada altogether.”
Aurora truly likes the medical marijuana business, and for the record, cannabis prices are only likely to be pressured lower. the bigger the industry gets and the more commoditized marijuana becomes.
Passing … For Now
Yet, as much as what the company does to differentiate itself, some owners of ACB stock have expressed concern over what the cannabis company doesn’t appear interested in doing. Chief among the areas where Aurora Cannabis isn’t making a full-court press is in the area of cannabis-infused beverages.
It’s a field that’s going to become very crowded, very quickly. Beer and spirits company Constellation Brands (NYSE:STZ) is leveraging its large stake in Canopy Growth to develop cannabis-based drinks, though it’s hardly alone. Dozens of smaller brands are already on shelves, with several more new drinks in the queue for this year, backed by more established brand names.
Aurora Cannabis isn’t yet convinced the potential is worth the trouble though.
“On the intoxication side of the fence with respect to cannabis drinks, the market is just not there. It’s not proven to be a popular item anywhere,” Booth says. Battley concurs: “Considering the anticipated relatively low market share of these products, we are not rushing this.”
The forecasts broadly agree. The projected market size for cannabis-based drinks is a modest $1.4 billion, and then will likely only reach that figure by 2024. That’s not a terribly big piece of pie to fight over.
Even analysts that fear Aurora is missing out on an opportunity concede there’s an upside to the hesitation. “We wonder if Aurora could be ‘missing the boat’ on an area which could prove large as newer consumers wanting less pervasive, socially accepted product forms demand both psychoactive (THC-infused) and CBD beverages,” wrote Bank of America analyst Christopher Carey following Aurora’s quarterly report. But, he first hedged his thesis by saying “We see the strategy as reasonable…”
Carey wasn’t concerned enough to lower his Buy rating on Aurora Cannabis stock, or cut his price target from CAD $15.
To that end, Aurora is also — for the time being anyway — disinterested in diving headfirst into a U.S. market that still has several matters to work out, not the least of which is the fact at the federal level, marijuana remains illegal.
That could change, but even if it does, Aurora is in no hurry.
That’s a Nelson Peltz thing, by the way. The activist investor became an advisor in March, and Battley commented that one of the first pieces of advice he gave the company was to “Take your time to enter not just one mature industry, but multiple different verticals. That would be a better thing for us to do for our shareholders.”
The cannabis company’s top brass still fully understands that even federal-level legalization would leave behind a complicated set of interstate rules, not to mention excess hype that could make dealmaking uncomfortably expensive.
The company’s long-range U.S. plan? “We don’t want to give up control to one company in one mature industry. Ideally, we want to participate in multiple verticals, and we see the opportunity to do that and that will be the best thing for our shareholders.”
Translation: Don’t look for a dominating partner to come into the picture until the time (and partner) is right, and don’t worry that the company will recklessly rush into markets that aren’t on solid footing. That’s in sharp contrast with many of its peers, which have been spending heavily, jockeying to get positioned for a U.S. market that may or may not open up anytime soon.
Another sliver of the business Aurora is glad it didn’t dive head-first into: Storefronts. Booth said during the recent earnings call that “The value of the first 25 stores in Ontario is dropping rapidly. We’re quite happy we didn’t jump into that fray.”
Bottom Line for ACB Stock
Although it’s becoming clearer what Aurora Cannabis is, and isn’t, relative to other marijuana stocks, there are still several unknowns and X-factors.
Given what can be ascertained thus far though, it’s clear enough that Aurora Cannabis stock ranks among the more sensible, sustainable names in the industry in that it is sensitive to the fact that it’s got shareholders. Sure, many of those shareholders are speculators, but still interested in knowing the organization is going to be capable of turning a profit in the foreseeable future. The projected swing to a positive EBITDA in fiscal Q4 is an encouraging step in that direction.
ACB stock still isn’t a name for grandma’s retirement portfolio. It is, however, a cannabis play that’s distinguishing itself as a more thoughtful opportunity in what so far has been a rather messy marijuana race.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.