Aurora Cannabis Has Significant Long-Term Promise

Summary

• What is probably the major factor weighing on Aurora Cannabis?
• If the company meets supply expectations, it could surprise to the upside in the latter part of 2018.
• Any delay in legalization will probably have more of an impact on Aurora than its competitors.
• There could be some short-term hiccups, but long-term, the company looks solid.

Source: technical420

Aurora Cannabis (ACBFF) has been one of the more disappointing of the larger cannabis stocks recently, as the company has failed to gain traction even after taking some significant steps to boost production while lowering production costs per gram.

Along with its major peers Canopy Growth (TWMJF) and Aphria (APHQF), it's been underperforming so far in 2018, although that is probably going to change as legalization of recreational cannabis in Canada approaches. Whether or not that holds in the short term will be determined by supply and demand factors.

At this time, there is a wide range of estimates as to how much recreational cannabis demand will come with legalization, so it has been difficult to build reliable models; all of which have contributed to the performance of Aurora Cannabis and others.

That is likely to continue until we get real numbers coming in that confirm the overall market potential in Canada.

For that reason, I think that after the initial predictable boost in share price that will accompany legalization, it'll pull back some until there is more visibility in the size of the market that emerges.

The depth of the pullback will be determined by whether or not market expectations are fairly accurate, or if demand starts off slow. Assuming expectations are exceeded, Aurora will get a good boost in its share price; especially if its "Aurora Sky" facility is fully operational when legalization is implemented.

CanniMed Therapeutics Inc. deal

I think the major weight on Aurora in 2018 has been its acquisition of CanniMed Therapeutics Inc. (OTC:CMMDF). The market simply believes management was too impatient and paid more for the company than it needed to.

Shareholders see the acquisition as being overly dilutive to the company, even though there are a number of positives to consider that should reward the company over the long term.

My view is management saw CanniMed as an important missing piece of the puzzle for the company, and apparently didn't want to lose its potential to a competitor, which could have added even more to the price if a bidding war ensued. It also could have lost the asset to an aggressive bidder.

Either way, the future potential is there, but also the dilution effect, which will continue to put some downward pressure on the share price in the near term. Further out, when it boosts revenue from domestic and international markets, part of which will be directly from the acquisition of CanniMed, I see it being considered more of a positive catalyst for the company.

Aurora Sky and CanniMed production

Aurora Sky is the 800,000 square foot flagship production facility located at the Edmonton International Airport, which is projected to produce more than 100,000 kg of cannabis per year.

The acquisition of CanniMed will boost medical cannabis production by another 20,000 kg per year.

Other facilities or companies the company has international positions in are Aurora Nordic, which it holds a 51 percent stake in, which has plans to build a 1 million square foot hybrid greenhouse in Denmark; has a 22.9 percent stake in Cann Group Limited (OTCPK:CNGGF); and a 17.62 percent stake in The Green Organic Dutchman Ltd., all of which are on the production side of the business. Pedanios, which is based in Berlin, is an importer, exporter, and distributor of medical cannabis in the EU.

It also holds just under 20 percent share of Liquor Stores N.A. (OTCPK:LQSIF) and over 17 percent of Radient Technologies Inc. (OTCPK:RDDTF). Aurora has other holdings as well.

The point is it has a solid production and distribution base in place in a variety of key markets around the world and is ready to meet growing global demand for medical and recreational cannabis.

The significance of Aurora Sky and CanniMed production is they should have the most immediate impact on the performance of the company and could help it push ahead of Canopy Growth in the short term, which could provide it some strong momentum.

For that reason, it's in the best interests of Aurora to have recreational legalization of Cannabis in Canada to happen sooner rather than later. The longer it takes, the less of a short-term advantage it'll probably have on Canopy, which will catch up to and surpass Aurora's production levels with the companies as they stand today.

Further out, it's going to build an even larger facility in Medicine Hat, Alberta, which will include 1.2 million square foot capacity, which is about 50 percent larger than Aurora Sky. Once completed, it's estimated Aurora should have capacity of about 430,000 kgs of cannabis annually.

Strengths of Aurora

Including the highly probable short-term capacity advantage over all of its competitors, there are a number of other strengths the company has enjoyed recently.

For example, as of the last quarter, it increased the amount of grams it sold by 116 percent year-over-year while cutting costs per gram by 24.6 percent.

Revenue jumped to $11.7 million in the last reporting period, up over 200 percent over the same reporting period last year.

The number of registered patients were also up by 78 percent year-over-year.

As I see it, the major problem for Aurora is in relationship to uncertainty surrounding the demand levels for recreational marijuana in Canada as well as how quickly its competitors ramp up production and potentially put downward pressure on prices and margins if demand isn't what is expected.

Conclusion

Assuming it gets its Aurora Sky facility at full capacity as recreational cannabis in Canada is legalized, Aurora does have a decent chance at generating some solid profits over a quarter or two while its peers scramble to boost supply to the market.

Over the longer term, it will continue to diversify across a number of markets, both in production facilities and distribution deals, as it has already been doing.

I believe the company could do very well in the early stages of recreational legalization of cannabis in Canada, come under some pressure once Canopy Growth and others boost production levels, and after more clarity emerges concerning supply and demand, it should generate stable results in the years ahead from increasing global demand, as its production capacity continues to grow.

Until companies are able to brand various strains of marijuana to the larger population, Aurora should be able to compete at a high level based upon price alone. It won't be sustainable over the long term because of the need for wider margins and stronger earnings, but in the short term, it should produce good results as the market looks for revenue to lead the way over the next year or two.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.