From one perspective, fiscal-second-quarter earnings look potentially bullish for Aurora Cannabis (NYSE:ACB) stock. The numbers, at least, are much better than they were the year before.
But I don’t think that’s the right way to look at it — particularly after a huge rally into the report. Sure, Aurora’s past results were awful. That’s a big part of the reason why ACB stock is down almost 90% from its highs.
Of course, the stock, even with a post-earnings pullback, has still rallied sharply from its lows. The Q2 report shows why it’s gone too far, and why it should have further to fall.
Earnings Are Better…
To look at Aurora earnings on a year-over-year basis, the report looks impressive. Spectacular, even.
Revenue rose 23%, with cannabis sales up 28%. Bear in mind that growth came despite a Canadian market that’s still scuffling somewhat. The novel coronavirus pandemic has had an impact, and regulatory red tape slowed store openings as the legalized market was getting off the ground.
Meanwhile, Aurora has essentially shuttered its wholesale business, where sales declined 90%. That’s a reasonable move, given the glut of capacity across the industry. But wholesale alone had a negative impact of four percentage points on revenue growth.
So the top line looks good. The bottom looks even better. In Q2 FY2020, Aurora posted an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of 69.9 million CAD. A year later, that loss narrowed all the way to just 16.8 million CAD, which includes about 4.7 million CAD of one-time expense.
If you look at those numbers, this seems to be a company on the right path.
…But Not Nearly Good Enough
I don’t think that’s actually the case.
Let’s look at revenue. Yes, 28% growth in cannabis sales is impressive. But the market has grown at likely a faster clip.
Indeed, after the Q4 report in September, chief executive officer Miguel Martin admitted that the company had lost its market share lead in the consumer business. There’s no way Aurora reclaimed the top spot in Q2: consumer revenue actually declined 17% relative to the first quarter.
In fact, total revenue relative to the first quarter actually declined, if by less than 1%. That’s not the kind of performance investors are looking for. It’s not the kind of performance they should be looking for. Now, Aurora’s profitability certainly has improved materially. But the improvement is coming from a slash-and-burn approach to costs.
Selling, general, and administrative expense (which also includes research and development spending) in the quarter, excluding one-time costs, was 42.3 million CAD. The figure was 100 million CAD the year before.
Year-over-year, excluding one-time costs in Q2 FY2021, the Adjusted EBITDA loss narrowed by 57.8 million CAD. The Selling, General, and Administrative Expenses fell by 57.7 million CAD.
There are two problems with that dramatic reduction. The first is that there’s not much fat left to cut. In fact, Aurora’s operating expenses were essentially the same in Q2 as in Q1. Yet the company still is losing money and burning cash.
The second problem is that this is a growth industry. Yet Aurora isn’t investing behind the business. Cannabis bulls — and I remain one — should be looking for companies that are investing in the long-term opportunity, instead of trying to fix near-term profitability metrics.
Stay Away from ACB Stock
Some investors might see the post-earnings sell-off as pricing in any weakness in the report. Across trading last Wednesday to Friday, ACB stock plunged 33%.
Of course, the stock also had soared into the report. Some investors likely hoped for a repeat of the well-received Q1 report in November. ACB also seems to have seen some spillover from the r/WallStreetBets frenzy.
Whatever the cause, after that 33% plunge ACB stock still trades 16% higher than it did at the beginning of the month. And that doesn’t make sense.
After all, this was a disappointing report. It’s a report that shows that the slash-and-burn strategy of the last four quarters has played out. Aurora needs a new plan.
Truthfully, I’m not sure it has one. This still is a company posting reasonably significant losses. The U.S. opportunity for Canadian operators will be huge — but it’s also still a ways off. And I’d better trust other players in the space to capitalize on that opportunity.
As far as Q2 goes, the problem is simple. This was a disappointing report. And yet, ACB stock has made considerable gains in the last two weeks. I don’t believe that combination will hold.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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