It’s a big week for cannabis plays like Aurora Cannabis (NYSE:ACB) stock. Most stocks in the sector trade at or near 52-week lows; Aurora Cannabis stock in fact hasn’t been this cheap since late 2017. But with a series of earnings reports on tap this week, including fiscal first quarter results from Aurora Cannabis on Thursday afternoon, investors in Aurora stock and other cannabis names are hoping the trend reverses.
At least in the early going, that hasn’t played out. Cronos (NASDAQ:CRON) grew revenue 250% in its third quarter, and CRON stock dropped 3% in regular trading. Tilray (NASDAQ:TLRY) sales more than quadrupled year-over-year, yet its shares declined over 2% in the after-hours session.
Industry giant Canopy Growth (NYSE:CGC) reports on Thursday morning, but at least for now it certainly seems like explosive revenue growth isn’t enough. If that’s the case, it’s unlikely ACB stock rallies after its own report.
The Numbers Problem for ACB Stock
The issue for ACB stock is that its fiscal first-quarter earnings report is likely to look similar to those of Cronos and Tilray. Revenue is going to spike: current analyst consensus predicts C$95 million in revenue, up 220% year-over-year. There’s a huge range in those estimates, admittedly, and Aurora cautioned after Q4 that “quarter to quarter sales volumes and revenue may be volatile.” But whatever the exact figure, Aurora is going to post significant top-line growth on a year-over-year basis.
But, again, that hasn’t helped other cannabis stocks so far, even with the group at the lows. Rather, investors have been focused on two key metrics: pricing and profitability. Tilray, for instance, disclosed a 48% decline in pricing year-over-year. With oversupply a key risk to production-heavy Aurora, similar pressure in Aurora’s Q1 will not be well-received.
Meanwhile, Aurora Cannabis walked back hopes for profitability in fiscal 2020 after Q4. It’s likely to post a loss even on an Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) basis in the quarter, and unlikely to change that guidance after a single quarter. Even profitability hasn’t been enough to drive stocks higher, as Aphria (NYSE:APHA) showed back in August.
In other words, Aurora Cannabis is unlikely to give investors what they’re looking for on Thursday afternoon. And that doesn’t bode well for Aurora Cannabis stock.
What to Look for in Aurora Earnings
Admittedly, I made a similar argument ahead of Aphria’s fiscal fourth quarter report. APHA stock soared after that release, even if it has since given back those gains. Perhaps ACB stock, too, can’t be written off so easily.
A revenue beat could help the stock. Better pricing than that seen at rivals, too, could be seen as a positive. Aurora stock is down 65% from March highs; it might not take that much to drive a relief rally.
That said, I’m skeptical. Last month, I detailed four reasons to avoid ACB stock, even at the lows. The issue with Q1 is that Aurora probably can’t assuage any of those concerns with a single quarter. Aurora stock still isn’t cheap, at roughly 10x enterprise value to revenue based on FY20 estimates. Those estimates likely won’t move much. Execution missteps in Q4, including results that actually came in below preliminary estimates, won’t be forgotten after a better quarter.
Profitability is unlikely to arrive this year. If that’s the case, fears about dilution will persist given that the company’s convertible debt will have to be paid off in cash, not stock.
Longer-term, Aurora Cannabis still has time to effect a turnaround. It has a broader reach than probably any cannabis company in the world. The Canadian market will right itself at some point. Aurora was able to add to its borrowing capacity a few months back, and may be able to do so again as it approaches EBITDA profitability.
But the near-term problem remains. Investors don’t trust the space, and they don’t trust Aurora Cannabis stock. Q1 earnings are unlikely to change either problem — and thus unlikely to help reverse the long decline in ACB stock.
As of this writing, Vince Martin has no positions in any securities mentioned.
