Aurora Cannabis (NYSE:ACB) is stuck in a downward trajectory in the stock markets.
Weak quarterly earnings from Tilray (NASDAQ:TLRY) and a regulatory violation from CannTrust Holdings (NYSE:CTST) are scaring investors away from the cannabis sector. When Aurora reports its quarterly results on Sept. 15, what should investors expect?
Strong Preliminary Sales
Aurora stock already reflects the upside quarterly results. On Aug. 6, Aurora posted preliminary fiscal fourth-quarter revenue in the range of $100 million CAD to $107 million CAD. This is up sharply higher from last year’s $19.1 million in revenue. Fiscal Q4 2019 net cannabis revenue will be in the range of $90 million to $95 million. Every business segment is firing on all cylinders, with activity strong both internationally and in Canada. Medical and consumer markets will be up year-over-year.
The fiscal 2019 revenue of between $249 million and $256 million still values Aurora stock at a price-to-sales in the 30 times range. Even though ACB stock fell from the $10 high in March to the $5.80 range recently, the markets expect strong revenue growth. Aurora cannot report any slowdown in sales nor may it miss on output. For Q4, the production available for sale will be in the upper end of the range between 25,000 kilograms and 30,000 kilograms.
Despite a forecast for exceeding key performance indicators, markets are no longer bidding the stock higher. In the long term, gross margins will rise as will kilograms of cannabis sold. And as cash costs per gram produced falls, the company will earn a profit. For now, Aurora’s adjusted EBITDA is not yet positive. Poor results from Tilray are creating an air of caution for Aurora ahead of its earnings report.
CannTrust’s disclosure of growing in unlicensed rooms shook away the inherent trust investors had for the company and for the sector as a whole. Health Canada is leaving CannTrust in the dark on what happens next. This is frightening. Regulations imposed on other cannabis firms might slow their growth rates.
Canopy’s Q1 Miss Hurts ACB Stock
On Aug. 15, Canopy Growth (NYSE:CGC) reported an EBITDA loss of $92 million CAD in the first quarter. Even though harvest rose 183% quarter-over-quarter and over three-fold year-over-year, losses mounted. But Canopy wrote down a $1.18 billion CAD warrant liability. It has no other big costs ahead and expects to accelerate the rate of output from here.
To shore up its balance sheet, Aurora upsized its credit facility by $160 million CAD to $360 million CAD. The company is bolstering its cash reserves to make an acquisition. Its chief financial officer Glen Ibbott said:
The upsizing of our credit facility and broadening of the lending syndicate to include additional Schedule 1 Canadian Banks is further recognition that our best-in-class production facilities lead the industry. Access to this non-dilutive capital is a core funding source the company intends to utilize as it further executes on its strategic growth initiatives.
As the valuation of other potential takeover targets falls, Aurora is positioned to buy them at a better price. Unfortunately, investors no longer have the patience to reward firms accumulating debt.
Conservative investors tired of waiting for profits should avoid Aurora stock — and cannabis stocks in general. Conversely, those betting on Aurora announcing a partnership with a major S&P 500 company would get rewarded if it happens. In the interim, Aurora Cannabis is working towards positive EBITDA.
Last week, Aurora completed its acquisition of Hempco Food and Fiber for just over $60 million CAD. It issued over 2.6 million shares to pay for the deal.
My Takeaway on ACB Stock
Shorts have the upper hand on Aurora Cannabis stock for the time being. At a short float of 11%, the stock will not bounce back until sentiment improves. The stock may retest yearly lows in the coming weeks. If that happens, long-time investors will need to decide if they should buy more shares or keep holding it.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
