Is Aurora Cannabis Stock Worth a Buy on Stratospheric Sales?

Aurora Cannabis (NYSE:ACB) has been a rocket this year, with Aurora Cannabis stock spiking about 44%. But things got off to a rocky start this week when the shares dropped by 5%. The main concern for ACB stock investors? The upcoming earnings report. Although the stock has since recovered some of the losses, it’s still worth a deeper look into their concerns.

So let’s take a look at the fiscal second-quarter results.

Revenue came close to quadrupling to C$54.2 million (in Canadian dollars), while the Street was looking for C$51.84 million (although, there are only two analysts with estimates). Last month, ACB issued its own forecast, which called for the top-line to range from C$50 million and C$55 million.

This hyper-growth should be no surprise. In October, the Canadian government legalized cannabis for recreational purposes. While there were supply issues and other snafus, the demand was off-the-charts. Note that ACB generated C$21.6 million from the consumer category in the quarter. This came to roughly 20% of marketshare.

However, ACB’s bottom line was far from inspiring. The company posted a massive loss of C$237.8 million, which was mostly due to charges from investments in cannabis companies. Keep in mind that the company is required to make adjustments to changes in market values.

There was also deterioration in gross margins, which is probably the biggest factor impacting Aurora Cannabis stock. They plunged from 70% to 54% on a quarter-over-quarter basis.

But on the earnings call, CFO Glen Ibbott noted that the company should be able to reach EBITDA positive by fiscal Q4. He also showed that the company has been disciplined with operating costs. And yes, there should be a big help from surging revenues and improvements in the production process.

In the meantime, the medical business continues to get traction. There are currently over 73,000 patients in Canada and ACB is conducting 40 clinical trials and seven pre-clinical studies. Even just a few drug launches could have a major impact on revenues.

All this means that high-quality production at scale is critical. To this end, ACB is running at annual production of about 120,000 kilograms and this is expected to increase by 30,000 within a month or so.

Bottom Line on Aurora Cannabis Stock

ACB stock is far from cheap. Consider that the market cap is at a hefty $7.3 billion. But then again, the rest of the sector is trading at premium valuations, as seen with Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY) and Cronos Group (NASDAQ:CRON).

But this is to be expected because of the massive growth opportunities in the sector. According to Altria (NYSE:MO) CEO Howard Willard, the spending on cannabis is expected to reach $40 billion within the next ten years on a global basis. As a testament to his enthusiasm for the sector, he recently invested $1.8 billion in CRON.

As for ACB, it has leveraged its highly valued stock to pull off aggressive M&A. This has allowed the company to gain important footholds in areas like Europe and South America (there is now a presence in 22 countries across five continents). ACB also has been able to assemble a large retail business in Canada.

Now as for Aurora Cannabis stock, there will be continued volatility. This is normal for any high-growth company. Besides, the business is diversified, well funded (with a recent convertible note offering of $345 million) and the M&A strategy looks spot on. In other words, for those looking for a play on cannabis, ACB stock is a pretty good choice.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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