Aurora Cannabis Has Become a ‘Blood in the Streets’ Opportunity

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The year has been tough on cannabis stocks, as supply issues, industry hiccups and earnings have left a trail of despair. Major companies, including Aurora Cannabis (NYSE:ACB), Canopy Growth (NYSE:CGC), Aphria (NYSE:APHA), Charlotte’s Web (OTCMKTS:CWBHF) and OrganiGram (NASDAQ:OGI) are all well off their highs for the year as a result.

Aurora Cannabis Has Become a 'Blood in the Streets' Opportunity

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Such declines may prove to be great buying opportunities, especially for ACB stock holders.

After all, the cannabis industry is expected to become a $22 billion industry by 2022, according to the Brightfield Group. In addition, support for legalization is exploding right along with sales estimates. A late-2018 Gallup survey found that 66% of Americans are in favor of legalization. That’s up from just 60% in 2016.

One of the companies that will benefit will be ACB stock. It’s the second-largest producer of cannabis in Canada, and in its recent quarter, produced 29,000 kilograms of cannabis. Now, the company has its expectations set on 625,000 kilograms by 2021.

Those are impressive growth statistics, for sure.

Don’t Expect ACB Stock to Explode Near-Term

At one point, the company could do no wrong. Over the last two years, Aurora Cannabis stock exploded 640% from a 2017 low of $1.58 to $11.73 a share.

Analysts were tripping over one another upgrading ACB stock, as it delivered sizable revenue growth quarter over quarter. The company brought on board billionaire investor Nelson Peltz as a strategic adviser. Peltz explored potential partnerships and ACB’s global expansion efforts. Aurora even boosted its production capacity above its rivals.

Unfortunately, the company also began to overpromise and underdeliver.

In early August 2019, the company guided for $100 million to $107 million net revenue for the fourth quarter. Management also guided for $90 million to $95 million in cannabis revenue and increased its quarterly production to 30,000 kilograms from 25,000 kilograms.

The good news is the company’s production of 29,034 kilograms was near the high-end of guidance. Cannabis net revenue even came in at the high end of guidance at $94.6 million, or 61% growth quarter over quarter.

When Aurora Cannabis reported net revenue, however, it missed its own guidance. Clocking in at $98.9 million, a quarter-over-quarter improvement of 52%, net revenues still missed the company’s own guidance of $100 million to $107 million.

Other than that, one of the most troubling parts of the earnings release included:

“Aurora has addressed previously identified production bottlenecks and continues to see strong sell-through of the Company’s products at the retail level. However, the Canadian consumer channel continues to experience challenges at the retail level in key markets and resolution of this issue is beyond the Company’s control. Aurora is working closely with all our regulatory and channel partners to streamline distribution as the Company continues to track toward positive adjusted EBITDA on a consolidated basis.”

While it’s certainly great news that Aurora is seeing improvements in bottlenecks, it’s disturbing that consumer channel challenges at the retail level are “beyond the company’s control.”

Near-Term Issues Will Give Way to Long-Term Opportunity

A report titled “Risk Management Within the Cannabis Industry: Building a Framework for the Cannabis Industry,” written by NYU Stern School of Business professors Karen A. Parker, Attilio Di Mattia, Fatima Shaik, Juan Carlos Ceron Ortega and Robert Whittle, details the risks involved in early-stage cannabis companies.

Aurora doesn’t do business in areas where marijuana is federally illegal, however, so many of those risks don’t apply to ACB. But the paper also discusses how a futures market for cannabis could help level-set prices. It’s worth a read to fully understand the cannabis market long-term.

Even with potential hiccups along the way, all signs still point to long-term success for Aurora Cannabis stock.

Volumes and sales are still growing at the fastest rate in the industry, and its gross margins continue to be among the highest. That alone gives reason for a second look at Aurora Cannabis.

In addition, we are nearing “Cannabis 2.0” on Oct. 17, 2019.

Cannabis 2.0 is when Canada is expected to legalize CBD edibles, beverages and topicals just a year after approving the use of dried cannabis flower, oils and sprays.

According to analysts at Deloitte, this could create a $2.7 billion opportunity for the industry. According to their report Nurturing new growth: Canada gets ready for Cannabis 2.0, legalization of edibles will “create new product mixes that will reach consumers who may have been reluctant to try traditional cannabis consumption methods that are currently available.”

The only downfall to Cannabis 2.0 is that the selling of those products won’t be allowed until December 2019 thanks to permit requirements. Still, the market holds multi-billion-dollar spending potential, especially when you consider that up to 60% of Canadians would use cannabis edible products, according to Deloitte.

Bottom Line for ACB Stock

The short-term pain of the cannabis industry may not go away any time soon.

However, the long-term growth trajectory of this industry is well off the charts with Aurora Cannabis a likely beneficiary. Granted, the company has warned of challenges, and has even overpromised and underdelivered. Aurora Cannabis is also still one of the best companies in the industry.

Even with its earnings miss, Aurora is still one of the biggest cannabis producers in Canada. It also expects to produce up to 625,000 kilograms of cannabis product over the next two years.

That puts Aurora Cannabis high on the list of the top cannabis companies that will be able to keep up with the demands of a sizable, growing market.

As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.

Ian Cooper, a contributor to InvestorPlace.com, has been analyzing stocks and options for web-based advisories since 1999.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/acb-stock-aurora-cannabis-blood-streets-opportunity/.

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