In mid-May, struggling Canadian cannabis producer Aurora (NYSE:ACB) reported strong third-quarter numbers which caused Aurora stock to pop a whopping 65% in a single day.
Sure, some of the meteoric rise has to do with short covering. According to YCharts, about 17% of all ACB shares outstanding were sold short heading into the third quarter print. Those shorts got squeezed when Aurora reported strong third-quarter numbers.
But Aurora’s post-earnings surge is much more than just a one-time short squeeze rally.
It’s the beginning of a multi-year turnaround in Aurora, one wherein Aurora turns into a steadily growing, healthily profitable player in the booming global cannabis market.
Ultimately, this turnaround will power Aurora stock up to $20 by the end of the year… and $50 by the end of the decade… making ACB stock a solid long-term addition to any growth portfolio.
Aurora Stock and Blockbuster Earnings
Aurora’s third-quarter earnings report represented a transformational moment in this company’s short history.
Throughout 2019, Aurora lost its groove. Once a growth machine in the booming Canadian cannabis market with a market share that was only rivaled by Canopy Growth (NYSE:CGC), Aurora turned into a shrinking company about six months ago.
Kilograms of cannabis sold dropped by more than 20% in back-to-back quarters. Revenues also dropped by more than 20% in back-to-back quarters. Adjusted EBITDA loss margins widened from 12% in the fourth quarter of 2019, to over 140% by the second of 2020.
Then, in February, management laid out a game-plan to gut the expense base, moderate cash burn, focus investments into higher-return verticals, and ultimately turn into a slimmer, more profitable, and faster growing company.
It worked. The numbers speak for themselves.
In the third quarter, Aurora sold 12,729 kilograms of cannabis, up 34% sequentially. Revenues rose 35% quarter-over-quarter. Gross margins stabilized in the 50%-plus range. Adjusted EBITDA loss narrowed from $80 million to $50 million, and loss margin improved by more than 76 points.
Management expects all of these favorable trends to persist and reiterated their call for the company to reach positive adjusted EBITDA in two quarters.
A Multi-Year Turnaround
This is more than just a multi-quarter turnaround into barely-profitable territory for Aurora.
It’s the beginning of a multi-year turnaround wherein Aurora will finally turn into what it was supposed to be several years ago: a quickly growing, profitable powerhouse in the booming global cannabis market.
Management has learned their lesson. They aren’t going to “spend at all costs” anymore. They are committed to remaining disciplined going forward. That discipline will keep Aurora’s expense base relatively small for the foreseeable future.
At the same time, the global cannabis market is finally coming into its own. In Canada, more aggressive retail store expansion coupled with new products like cannabis-infused chocolates, drinks, and vapes, will spark a huge cannabis demand surge in the back-half of 2020, which will last for several years.
Elsewhere, U.S. legalization of cannabis is progressing at a rapid pace, while most of Europe appears positioned to follow in Germany’s footsteps in the cannabis space.
In other words, the cannabis growth narrative is in the early stages of pivoting from “it’s barely lifting off in Canada”, to “it’s taking off across the globe.”
Throughout the 2020s, then, Aurora’s revenues will soar higher behind favorable legislation progress and improving demand trends. Concurrently, the cost base will remain relatively small thanks to disciplined cost control from management. That combination implies huge profit growth potential for Aurora over the next several years.
Aurora Stock to $50
Huge profit growth is exactly what will happen at Aurora in the 2020s. And it will provide enough firepower to drive ACB stock up towards $50 in the long run.
My long-term model for Aurora makes some very simple assumptions, including:
- Global legal cannabis sales rise by more than 15% per year into 2030, supported by more widespread legalization and commercial availability.
- Aurora’s sales rise by more than 20% per year into 2030, supported by stable market share in Canada and expansion into new international markets.
- Gross margins, which presently hover around 55%, scale towards 60% as promotional pressures ease and production centers hit full capacity.
- Operating margins expand to ~25%, driven by positive operating leverage on the back of 20%-plus revenue growth and disciplined cost management.
- Aurora’s earnings per share trend towards $3 by 2030.
The five-year average forward earnings multiple for the stock market is roughly 17. Based on a 17-times forward multiple, $3 in 2030 EPS implies a 2029 price target for ACB stock of over $50.
Discounted back by 10% per year, that equates to a 2020 price target for Aurora stock of over $20.
Bottom Line on ACB Stock
Aurora stock has been one of the market’s biggest losers over the past year. During that stretch, ACB stock has lost about 90% of its value.
But strong third-quarter earnings confirm that this decline may be over. More importantly, they imply that the company could be on the cusp of a huge, multi-year turnaround.
If that turnaround plays out as expected, then ACB stock could roar to $50.
Sure, there are some major risks here. The balance sheet is cash-poor. Competition is stiff. Legalization is a tough hurdle to jump over internationally. The company still hasn’t struck a profit.
But, in my opinion, those risks are just noise. Aurora will brush off those risks, and power higher over the next decade behind secular cannabis tailwinds, especially now that management is exercising extreme cost discipline.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long CGC.