Aurora Cannabis (NYSE:ACB) reported its third-quarter results on May 15. They didn’t meet analysts’ consensus expectations. ACB stock temporarily lost some ground, only to regain those losses by the end of the day’s trading.
That’s a common occurrence when it comes to Aurora Cannabis stock and most other publicly traded pot stocks. The cannabis industry is still the Wild West, featuring maximum volatility and huge risks and rewards.
As Canada gets set to legalize marijuana edibles and cannabis-infused drinks in October, Aurora is preparing to meet the demand for those products, whose sales could surpass those of the actual leaf.
In recent articles, I’ve changed my tune on ACB stock, as Aurora has demonstrated that it’s building a foundation that’s as wide as it is tall. If you own Aurora stock, this ought to be music to your ears.
The easy play for Aurora would be to focus on profitability at the expense of diversified revenue streams that, down the road, will bear significant fruit for all its stakeholders.
Canada’s cannabis companies, including ACB, must be blamed for failing to deliver enough supply for recreational pot smokers in the months following the legalization of recreational marijuana in October 2018.
That’s why Aurora is doing as much as it can ahead of time to ensure this October isn’t a repeat of last year’s failure to deliver. Here’s how it plans to do that.
Holding Back Inventory
There’s no question that Aurora is continuing to build its inventory.
In Q3, it almost doubled its production versus the same quarter a year earlier, to 15,590 kilograms. It generated C$29.1 million from selling pot for medical purposes and C$29.6 million from sales of marijuana for recreational purposes. Overall it sold 9,160 kilos of cannabis in Q3, 31% more than in Q2.
However, since edibles, concentrates, and cannabis-infused drinks will soon be legalized in Canada , it’s got to ensure it has enough cannabis inventory to make these products.
“What we’re trying to do is learn from the challenges of the industry last year and the initial launch of consumer legalization — we absolutely have to have sufficient inventory to launch these products properly,” Aurora CFO Glen Ibbott said on Aurora’s earnings conference call. “So if that means taking a little bit of revenue out of Q4 and putting it into inventory, into new products, then that’s what we’ll do.”
So, even though Aurora expects to produce 25,000 kilograms of cannabis in Q4, 60% higher than in Q3, its top line may come in below expectations.
For now, Aurora will focus on edibles, vape pens, and concentrates, leaving infused drinks until later, when it’s had time to understand what consumers are looking for in that area. While there’s a risk that ACB will fall behind Canopy Growth (NYSE:CGC) and Hexo (NYSEAmerican:HEXO) on the drinks front, potentially hurting ACB stock in the process, given ACB’s failure to make a partnership deal with a large beverage maker such as Constellation Brands (NYSE:STZ) or Molson Coors (NYSE:TAP), it makes sense for Aurora to postpone launching infused drinks.
Strategy Is Positive for ACB Stock
When I wrote my past articles, before I began to understand Aurora’s game plan, I viewed its CEO, Terry Booth, as a snake-oil salesman who was conning the owners of ACB stock out of their hard-earned dollars. But the more I read about Aurora’s business, and more importantly, its focus on delivering for its end users, the more I see the method to its madness and the more I believe that its strategy will prove to be positive for ACB stock.
At the moment, the balance between supply and demand in Canada is out of whack. It doesn’t help that black markets continue to account for a significant percentage of recreational sales.
In the first three months of 2019, 38% of Canadian cannabis users bought marijuana from the black market, down from 51% a year earlier. But as the volume of legal pot sold goes up, and prices go down, companies like Aurora that are building significant production capacity will continue to reap substantial benefits from the Canadian recreational and medical markets.
I believe that edibles, cannabis-infused drinks, and concentrates will be a bigger part of the Canadian cannabis landscape than the leaf itself. Older, non-smoking users will be more likely to try products other than the leaf and realize that marijuana is healthier than pounding back alcohol.
Aurora’s decision to forego revenue in the near-term to prepare to meet this future demand, is creating a stronger foundation at home and will allow it to grow faster internationally. As a result, ACB will become a global player capable of holding significant market share outside of Canada, and ACB stock will perform better over the longer term.
The Bottom Line on ACB Stock
The owners of marijuana stocks, rightly or wrongly, seem to be focused on production growth rather than revenue or earnings growth. As a result, the faster Aurora gets to 25,000, 50,000, and 100,000 kilograms of cannabis produced in a quarter, the faster ACB stock will rise.
While I don’t like the fact that ACB lost C$158.4 million in Q3, three times the loss than analysts had expected on average, investors ought to be happy that its overall production continues to gather steam.
The future of ACB stock continues to get brighter but I wouldn’t own Aurora stock if your eyes aren’t wide open to the fact that its volatility remains significant.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.