You may be ready to leave the hope of Aurora Cannabis (NYSE: ACB) . This is understandable after the company's ugly financial results from the first quarter of 2020.
Canadian cannabis producer's revenue is declining. The main point is getting worse. Do not let seemingly positive net income as a result of accounting for derivative liabilities fool you on that front. Aurora continues to burn through the cash.
Aurora's road to success may seem almost impossible, but it is too early to give up the company. Here are 10 reasons.
. Headwinds are only temporary
Aurora Cannabis CEO Cam Battley readily acknowledged in the company's 1st conference call that there have been some major challenges due to the lack of cannabis stores in Canadian provinces. He admitted that "these problems will take some time to solve," But taking some time to solve is a different animal altogether than not being able to solve the problems. The reality is that these headwinds are only temporary. As more stores open, especially in Ontario, sales to Aurora will increase.
2. Aurora brands enjoy strong popularity
It is important to understand how popular Aurora's leisure cannabis brands are. The three best-selling dried cannabis flower products in Ontario's online store belonged to all Aurora. Battley said Aurora's brands "remain either # 1 or # 2 in all major markets across the country."
3. Momentum for medical cannabis sales to pick up
A positive for Aurora in the first quarter was that sales of medical cannabis in Canada increased by 3% quarter. The company's number of active medical cannabis patients in the country jumped 8% from the previous quarter. Aurora is actively trying to remove medical patients from other licensed manufacturers with some temporary price incentives. It seems quite likely that the company's medical cannabis sales speed will pick up.
4. Rumors of a supply glut are greatly exaggerated
You have no doubt heard someone say that a supply glut is already beginning to emerge in the Canadian market. But Aurora's average net sales price per gram in the recreational market for adult use rose 7% quarter over quarter in Q1. Aurora CFO Glen Ibbott stated that this increase shows "the demand for high quality recreational cannabis is strong." He is right. There may be over-supply scenarios for certain types of cannabis products, but the rumor of a total supply cloth is greatly exaggerated. Aurora's higher average selling prices prove that.
5. Aurora's gross margin remains the best in the industry
Aurora reported a 58% gross margin in the first quarter, the best in the Canadian cannabis industry. The company can deliver such an impressive gross margin due to the low production costs. Because of the strong gross margin, Ibbott stated, "Aurora can compete strongly in any market situation and will still deliver healthy returns at prices that would not be sustainable for others." It's not just spinning. If a supply glut comes, Aurora will be in a better position to weather the storm than most of its peers. And if demand continues to grow faster than supply, Aurora will be able to make more money than most of its peers.
6. Cannabis 2.0 market has not yet reached full bloom
Although the Cannabis 2.0 market for cannabis derivatives technically opened on October 17, sales will not begin until mid-December due to the 60-day notice period required by Health Canada for new products . This market will not begin to take off until well into next year. Larger companies like Aurora should be able to benefit from more of the upcoming growth in the Cannabis 2.0 market than smaller cannabis manufacturers.
7. International markets are ripe for growth
Aurora's international sales of medical cannabis jumped 11% quarter over quarter in Q1 and now generates 7% of the company's total net revenue. The company expects even higher growth rates in international markets going forward.
8. The company cuts its investments
Although Aurora took a wrong step in Q1 towards achieving profitability, the company's management appears to be serious about its commitment to being profitable. Aurora decided to stop work to complete the construction on Aurora Nordic 2 and Aurora Sun facilities. These moves will cut the company's capital expenditures by around $ 190 million in Canadian and will improve the bottom line.
9. Aurora makes extensive use of its "ticking time bomb"
A few months ago, I warned about Aurora's "ticking time bomb" – $ 230 million in convertible bonds maturing in March 2020. The company appears to be largely emptying this the time bomb but with a plan to allow investors to convert the bonds to the Aurora stock earlier than the maturity date with a 6% discount to a five-day volume-weighted average rate. Aurora has already set up support for the plan from investors who own around CA $ 155 million of the bonds. This move helps Aurora in that the company doesn't have to cross to raise lots of cash to pay off bondholders in 2020.
10. A US CBD Partnership Should Not Be Too Far Away
Aurora has still not announced a major partnership agreement with a US company as some of its peers have done. However, CEO Michael Singer said in the Q1 call that Aurora is "actively involved in negotiating a long-term relationship" with several consumer-packaged goods companies. He added that Aurora is not only looking at entering the US CBD market, but also hopes that the partnership (s) will be a "springboard" for international expansion.
Hold on to the towels
Am I saying that Aurora Cannabis is a great stock to buy right now? No. It will almost certainly be a huge volatility for marijuana stocks, in general, which will also affect Aurora.
However, I think it is far too early to predict a doom and gloom scenario despite the admittedly disappointing results in Q1. Hold on to those towels instead of tossing them in the ring: Aurora is not done yet.