Aurora Cannabis Inc. (ACB– Get Report) is the latest of several major marijuana companies to post disappointing earnings results, sending ACB shares plummeting 9% in after-hours trading on September 11. Investors took fright after ACB revealed weak earnings guidance and a significant fourth quarter revenue miss. Indeed, Tilray (TLRY), Canopy Growth (CGC) and Acreage Holdings (ACRGF) have all reported weak top-line outcomes in part due to issues with packaging and growing that have bogged down the Canadian legal recreational cannabis market.
Amid overall weakness among the largest players in the space, investors want to know where Aurora goes from here. Indeed we can see from TipRanks that ACB currently shows a Very Negative investor sentiment right now. That’s with investors selling on both a 7-day and 30-day perspective.
So should you buck the trend and snap up Aurora now? Let’s dive in.
What Went Wrong?
According to its Q4 fiscal 2019 earnings release, ACB posted a net loss of CA$2.26 million despite generating net revenues of CA$98.94. While revenue gained 52% from the prior-year quarter, the figure fell below the CA$108 million consensus estimate. For the full year, the company said its net loss was CA$297.9 million on CA$247.9 million in net revenues.
This was especially troubling as the company already lowered Q4 guidance back in August, telling investors that it was now expecting to see revenues between CA$100 million to CA$107 million. Management attributed the miss to the slow roll-out of retail outlets for recreational marijuana.
Canadian consumer channel continues to experience challenges at the retail
level in key markets and resolution of this issue is beyond the Company’s
control. Aurora is working closely with all our regulatory and channel partners
to streamline distribution as the Company continues to track toward positive
adjusted EBITDA on a consolidated basis,” the company stated.
management believes ACB is on the right track, it isn’t expecting to reach
profitability until fiscal 2020, later than it previously stated.
Investors did get some good news as production volume increased 86% quarter-over-quarter to reach 29,034 kilos thanks to its new cultivation facilities. Sales also jumped from just 9,160 kilograms in the previous quarter to reach 17,793 kilograms.
expressed concern that even with a dramatic increase in sales, the company pushed
back its profitability timeline. It doesn’t help that its overall average net
selling price fell from CA$6.40 per gram in the third quarter to CA$5.32 in the
fourth quarter as a result of low selling prices in the consumer and wholesale
That being said, ACB still has a lot going for it. Problems with production that have previously weighed on the company no longer appear to be an issue.What’s more, gross margin also improved, suggesting that the company has made significant progress in its efforts to cut production costs per gram.
Not to mention the Cannabis 2.0 market, or the upcoming derivative legalization in Canada, presents new opportunities for ACB. To capitalize on this emerging market, several new products are slated for a December launch including cannabis-infused hard baked goods, chocolates and mints.
“Aurora expects to have a robust product line-up ready to launch in December. Given the very early stage of development of the consumer market in Canada and international medical markets, management anticipates that quarter-to-quarter sales volumes and revenues may be volatile,” management stated.
It should also be noted that Aurora’s recent sale of its remaining stake in The Green Organic Dutchman Holdings (TGOD) for $86.5 million could drive an improvement in cash flow.
Analysts Weigh In
RBC Capital analyst Douglas Miehm said prior to the release that revenues are not effective in gauging the company’s performance. “Despite revenues that ultimately look to come in below our initial expectations, we believe results could support a ‘stand out’ quarter of sorts for the company on a relative basis. We think investors will likely look favorably at recreational growth this quarter compared with Canopy Growth Corp., which has seen slowing recreational sales for two subsequent quarters,” he argued.
Stifel Nicolaus’ W. Andrew Carter isn’t as sure. “We are taking a more cautious approach to the stock because of a less optimistic view of the global medical-use market outside of Germany and Canada. We also see Aurora’s expansion in the Canadian market expensive,” he explained in his initiation note.
The Bottom Line
All in all, the Street is cautiously optimistic about ACB with it receiving 3 Buy ratings and 4 Holds in the last three months. The consensus among analysts is that ACB is a ‘Moderate Buy’, with its $9 average price target indicating 56% upside potential.
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Source: TipRanks Blog