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Cannabis 2.0 May Reignite Rally in Aurora Cannabis Stock

ACB stock continued its long-term decline, but Cannabis 2.0 could bring back growth

When Hexo Corp (NYSE:HEXO) posted preliminary fourth-quarter and full-year 2019 results, it took Aurora Cannabis (NYSE:ACB) stock down with it. Hexo said it expected lower product sell-through, spooking investors in cannabis stock. But if Hexo cannot meet its $400 million revenue target for next year, Aphrira (NYSE:APHA) and Canopy Growth (NYSE:CGC) might have to revise forecasts, too.

But what about Aurora? The firm already reported Q4 results in September. What are Aurora’s prospects like?

Aurora reported a four-fold increase in revenue in Q4. Revenue rose to C$98.9 million but gross margin declined to 58%, down from 74% last year. Inventory for cannabis and biological assets doubled to C$144.3 million. Even though kilograms produced rose 12 times and kilograms sold increased 10 times, ASP (average net selling price) fell.

ASP of dried cannabis dropped 30% to C$5.58 while that of cannabis extracts fell 23% to C$10.37. How will Aurora expand revenue to outpace costs and realize a profit?

ACB Stock 2020 Outlook

Aurora expects retail infrastructure to expand in 2020. This contrasts to the 2019 constraints, in which distribution in key provinces held back the business. As it adds retail stores next year, higher consumer engagement will increase awareness of the Aurora brand and grow sales.

As it manufactures at a commercial scale for all of its products, Aurora will set its pricing at a level that produces strong positive margins. Profitability is dependent on the Canadian provinces allowing for more retail store openings. In particular, Quebec, Ontario, and Alberta were slow in opening stores to address the strong demand for the product. This led to slowing sales in July and August and probably resulted in Aurora missing estimates.

Still, Aurora has healthy sell-through rates and is positioned to benefit from the retail expansion in Canada next year.

Declining Costs

Aurora’s heavy CaPex (capital expenditure) spending in the last quarter was also its peak. And while some of that CaPex commitment will be incurred in the current first quarter, much of the heavy spending is complete.

The company may now balance costs of supply with demand levels. Technology, automation, and other long-term investments will not change but will lower production costs and increase the health of the business in the long-term.

In the short-term, Q1 costs will still be high due to related large production facility costs. After that, CaPex spending will fall in the quarters ahead. After ACB stock closed near 52-week lows last week, markets priced in the near-term cost of headwinds and potential demand slowdown ahead.

Aurora Stock’s New Opportunity

Alberta lifted its moratorium on retail stores, stocked up considerable amounts of cannabis, and granted stores licenses. But not all the stores are open, creating inefficiency in the market. Once more stores open, sales volumes should increase as supply meets heightened demand.

Cannabis 2.0, which allows for new products to come on-board later this year, caused Aurora’s SG&A costs to increase 9%. Still, if Cannabis 2.0 arrives on time, Aurora will have more opportunities to sell a new set of products to consumers.

Your Takeaway on Aurora Stock

Markets continued punishing Aurora stock weeks after the company missed its revenue guidance by 1%. This sounds like a rounding error, but management should have anticipated the weaker non-cannabis-related revenue. Investors cannot predict when the selling pressure on ACB stock will ease. If it bounces back, investors should still wait for the stock to retrace lower on profit taking.

Even if Aurora grew revenue by at least two-fold annually over the next five years, the stock trades at fair value with no upside. Investors should wait. Once the stock stabilizes and finds a bottom, investors betting on a 2020 recovery may start accumulating ACB stock at these levels.

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


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/cannabis-2-0-may-reignite-the-rally-in-aurora-cannabis-stock/.

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