Aurora Cannabis (NYSE:ACB) stock dropped in after-hours trading on a weak earnings report. Shares fell from $6.49 at the close Sept. 11 to below the $6 level. With results failing to meet consensus, investor sentiment for ACB stock could become more negative. But is this recent stumble an opportunity to load up on Aurora Cannabis stock?
Shares continue to trade at a high valuation. But the long-term strategy for Aurora may still be in motion. Let’s take a closer look and see if there’s short-term upside for the ACB stock price.
ACB Stock Earnings Fall Shy of Consensus
On Sept. 11, Aurora released earnings for their fourth quarter which ended June 30. Net cannabis revenue grew 61% from the prior year’s quarter, to $94.6 million CAD. The company’s cash cost to produce per gram fell 20% to $1.14 CAD per gram. Gross margins grew to 58% from 55% in the prior year’s quarter. Thanks to increased margins, the company’s adjusted EBITDA losses shrunk from $36.6 million CAD in Q3 2019 to a $11.7 million CAD loss in Q4 2019.
For fiscal year 2019, sales were $247.9 million CAD. This is an 349% increase from the prior fiscal year. But despite this growth, Aurora fell short of consensus. Earlier in 2019, ACB anticipated positive adjusted EBITDA by the end of FY19. But the company revised this guidance in August. After yesterday’s earnings, the company is no longer referencing “positive adjusted EBITDA.” Instead, Aurora “expects adjusted EBITDA to improve.”
The analyst community also pared down their estimates after the August walk-back. According to FactSet (NYSE:FDS), prior to August, analysts estimated Q4 revenue of roughly $112 million CAD. This was cut to a range of $100 million CAD-$107 million CAD. With actual Q4 performance falling short of this revised consensus, there are new challenges to the growth story with ACB stock.
Other cannabis stocks have posted weak results in the past few months. Weak numbers at Canopy Growth (NYSE:CGC) pushed shares down 25% since mid-August. Tilray (NASDAQ:TLRY) shares have fallen from $41.16 per share to near $30 per share since its August earnings release. Reality is bringing pot stock valuations back to earth. Does this mean it’s time to buy on the dip? Let’s take a look at the valuation of ACB stock relative to peers.
Aurora Cannabis Stock Trades at a Premium to Peers
ACB stock trades at a premium to most of its peers. Aurora Cannabis stock trades at an enterprise value/sales ratio of 53. Compare this to Canopy Growth, which trades at an EV/Sales ratio of 40.5. Tilray trades at an EV/Sales of 36.2. Aphria (NYSE:APHA) trades at a low EV/Sales ratio of 9.7. The only major pot stock trading at a higher valuation is Cronos (NASDAQ:CRON). Cronos trades at a staggering EV/Sales ratio of 106.4.
But does this make ACB stock overvalued? The cannabis sector in general continues to be richly priced. Despite stumbles, investors anticipate a bright future for the marijuana industry. But with top-line performance falling short of expectations, can investors expect a short-term rebound? The Canadian marijuana market continues to be over saturated. A fully open U.S. market continues to be out of reach. Congress has made little progress on federal marijuana legislation.
A saving grace for Aurora Cannabis stock is the company’s global diversification. As I have mentioned previously, Aurora’s focus on European markets has been a strength. Aurora has also focused more on the stable medical segment. But other risks counter the bullish case. The company’s heavy use of convertible debt could cause problems down the road. Additional issuance of shares could drive the ACB stock price down further.
Stay on the Sidelines With Aurora
It’s tough to stomach the current ACB stock price. While the company has many strengths, the path to profitability remains unclear. There needs to be a shakeout in the Canadian cannabis market before it can become profitable. Solid movement on the U.S. federal legalization front needs to happen. One of the major marijuana stocks needs to hit profitability. Even if said “profitability” is adjusted positive EBITDA.
I believe marijuana stocks will fall further. Aurora Cannabis stock is no exception. The company’s shares could rebound on a crumb of good news. But in the short term, all bets are off with regards to the ACB stock price. To play it safe, stay on the sidelines with Aurora. Wait for a more opportune moment. If valuations turn irrationally low, make your move. But otherwise do not enter a position.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
