After an unrelenting decline since the start of 2019, Aurora Cannabis (NYSE:ACB) may continue its dramatic drop in 2020. The sudden executive changes, a stock sale, and a continued inventory correction in cannabis will hurt the sector. Aurora is in even more serious trouble than its competitors because of the sudden shift in strategy. The firm is shifting from expansion to contraction. That disruption will force shareholders to give up on the growth story.
Aurora raised $CAD 230 million by selling 5% unsecured, convertible debentures due March 9, 2020. But after 99% of holders elected for early conversion of debt into stock, existing shareholders faced dilution.
Still, the cash raise will prevent bankruptcy, at least in the near-term. After stabilizing its balance sheet with a cash infusion, management may renew its focus on growing revenue.
The company reported revenue of 75.2 million CAD, up by 217.6% from last year’s levels. Kilograms of production grew 43% to 41,436 in the quarter (Q1/2020).
Unlike companies like Tilray (NASDAQ:TLRY), Aurora’s average selling price per gram rose 7% to $5.68 (slide 3). Although the stock is valued at around 10 times sales, investors will appreciate that Aurora has a diversified revenue base. It has sales in the consumer, Canadian medical, and international markets.
So, it may simultaneously grow its active registered patients (up 8% in Q1/2020) while expanding the rest of its business geographically.
Chief Corporate Officer Cam Battley left Aurora on Dec. 20, creating further uncertainties in the management team’s leadership. “Our roots run deep, and Cam has been an integral part of the development, growth, and expansion of Aurora,” said Aurora CEO Terry Booth.
Battley’s exit may help restore Aurora’s credibility with the markets. The executive once said on Feb. 2019 that the Edmonton-based marijuana producer’s key objective is to get a handle on its costs in an effort to become profitable by the first half of the year.
But Aurora did not reach profitability until Q1, earning just 0.01 CAD EPS.
Aurora halted the construction of two cannabis facilities to save 110 million CAD. This signals the market is oversaturated with supply. The good news is that this helps end the negative cash flow.
Wall Street has yet to update its price target, which has an average of $3.47. Analysts from Cantor Fitzgerald, Cowen and Co., and PI Financial all have a “buy” rating on the stock. But they may throw in the towel ahead of the next earnings report sometime next Feb. 2020. The sector shows no sign of alleviating the excess supply in the Canadian market.
The scrapping of the lottery ticket system in Ontario will speed up store openings. Starting in April, the province will add 20 more stores monthly. This will lead to improving sales. So, the stock may stabilize sometime over the next five months as revenue growth resumes.
Aurora is unlikely to open a massive store like it did in Edmonton, which it announced on Nov. 27. This store is an experiment at West Edmonton mall, which attracts 30 million visitors annually.
The mall is a tourist spot, so if its retail store does well, Aurora may follow the same strategy in Ontario. This would require the cannabis company to open in a popular mall destination, such as the Eaton Centre in Toronto.
Conservative investors with a 3-4 time horizon may forecast modest revenue growth of 50% annually in a 5-Year DCF Revenue Exit Model. In this scenario (per finbox.io), Aurora’s stock could trade back above the $2.50 range.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.