These Combined 3 Major Catalysts  Will Send The Share Price Of Aurora Cannabis Soaring

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About: Aurora Cannabis Inc. (ACB)
by: Gary Bourgeault
Summary

The market doesn't fully understand the potential of recreational pot, CBD, and medical cannabis in the years ahead.

What role recreational pot plays in the near term for Aurora Cannabis.

For some time company management has stated its primary business is medical cannabis - why that's so important.

3 catalysts that will drive aurora cannabis growth for years Source: Seeking alpha

Aurora Cannabis (ACB) has lot of pieces to its business, at times making it a difficult company to analyze because it at times obscures the macro of the business with so many micro parts.

But investors need to only look at three major things with Aurora Cannabis in order to understand the extraordinary growth potential the company has. They are recreational pot, CBD, and medical cannabis.

In this article, we'll look at those three macro elements of the business and why when combined, they represent so much revenue and earnings potential over the long term.

Recreational pot

Probably the most important thing associated with recreational pot is that its legalization in some countries and states has propelled cannabis in general, into the public consciousness.

It does of course represent a tremendous revenue opportunity for Aurora Cannabis and other companies, especially over the next couple of years, as it's the revenue base allowing for companies to operate while they work on other more profitable and predictable revenue streams.

In the case of Aurora, it does better than many of its peers because it has about a 50/50 split of revenue from recreational and medical pot. In contrast, Canopy Growth has about 75 percent of its revenue coming from recreational marijuana at this time.

That's important because recreational pot doesn't generate significant margins, which weakens earnings.

In the last quarter, Aurora's revenue from recreational pot increased, which brought it to being slightly over 50 percent of its overall revenue.

I'm not suggesting this is a negative, but only that recreational pot is considered to be more of an interim revenue stream that over time, will decline as a part of overall revenue, while CBD and medical cannabis sales become a larger percentage of Aurora's top line. Eventually, that will widen margins and generate higher earnings.

Even if more countries legalize recreational pot, this won't change. With Aurora's market-leading cannabis production, it wants to allocate resources to the more profitable products, and that means it will prioritize CBD and medical cannabis applications over recreational, once the choice has to be made. The choice will be triggered when Canadian recreational demand is met.

For the most part, when looking at any cannabis company, it is overwhelmingly exposed to recreational pot, including in the U.S., it is highly susceptible to failure over the long term.

I'm not suggesting investors should sell those stocks at this time, only that there will be nowhere else to go once recreational pot companies fully supply that market. That's why most small pot companies without the resources to build out CBD and medical pot businesses, aren't going to survive. Aurora isn't one of them.

CBD business

Probably the most hyped part of the cannabis sector at this time is the CBD segment of the market. Much of that is associated with the potential of the U.S. market.

There is a lot of potential here, but there are still some limitations in the U.S. that have to be considered in order to manage expectations. For example, it's still illegal “to introduce food containing added CBD… into interstate commerce, or to market CBD… products as, or in, dietary supplements, regardless of whether the substances are hemp-derived.”

Former FDA Commissioner Scott Gottlieb made that statement on the same day the 2018 Farm Bill was signed into law.

A part of the problem is the FDA approved CBD as a drug before it started to be marketed as a dietary or food supplement. The two can't be marketed as a supplement and a drug at the same time. That's why interstate commerce is illegal. This is why companies like Cronos are focusing on marketing and selling vape cartridges, sprays, tinctures and CBD creams. Aurora management has stated in the past the CBD market in the U.S. is far from clear, and they aren't in a hurry to aggressively pursue it at this time.

The FDA has clearly stated it will take some time to reach a final decision on the guidelines companies marketing CBD can use as parameters for doing business in the U.S.

For that reason, the optimistic outlook for CBD sales in the U.S. will have to be lowered in the near term.

When the smoke all clears with CBD, it's going to be a large global market. I think the best way to think of CBD in general, is to consider it as very similar to the current supplement market.

Medical cannabis

Aurora Cannabis management considers the medical cannabis market as its core business, and I agree that it has by far the most potential of the other segments, even though it gets the least amount of media coverage.

Something else to take into account is some people conflate CBD used for wellness with CBD used for medical treatments, when they should be kept separate. The wellness market is very different than the medical cannabis market, and should be treated as such when analyzing the company.

I think the major reason for this is the focus on preventative medicine by a growing number of people, where supplements are considered a big part of remaining healthy, and treating the symptoms after a medical condition is discovered, which is considered to be traditional medicine. A lot of people and doctors consider them to be two sides of the same coin.

While that may be true to some degree, as it relates to Aurora Cannabis, the two have to be separated. It's one thing for people to buy a supplement, it's another to buy a treatment that deals with symptoms of a disease or condition they have. The reality is the latter is far more profitable than the former.

In the cannabis market the obvious example is GW Pharmaceuticals and Epidiolex, which is approved by the FDA for treatment of seizures for people with Lennox-Gastaut Syndrome or Dravet Syndrome. This will be a significant, long-term revenue and earnings catalyst for the company.

I believe when Aurora Cannabis management is talking about medical cannabis, they aren't primarily referring to CBD products, they're looking at ways to treat existing conditions that gain approval from regulatory agencies. This is where the real money is, and very few people are talking about it. It's also why it recently joined forces with the UFC in order to engage in advanced research in regard to CBD.

Finding solutions in the sports medicine market would be a huge breakthrough and great revenue stream. This is just one of the many possibilities available. There is also the treatment of PTSD, ALS, chronic pain, Crohn's disease, multiple sclerosis, nausea and vomiting associated with cancer treatments, among others.

While these can be treated by cannabis now, companies doing research and learning more effective ways to treat the conditions - going through the approval process like GW Pharmaceuticals has - will be able to enjoy a huge competitive advantage over their peers.

Conclusion

As these three segments of the cannabis sector continue to grow, Aurora Cannabis is uniquely positioned to grow along with them. That unique position is the fact it is rapidly separating itself from all competitors on the production side of the business.

Not only does it need a lot of cannabis to serve the recreational, CBD wellness and medical cannabis markets, there's the need to have a variety of strains and quantity of supply in order to do research and set aside for various other needs.

Some have questioned the wisdom of moving to grow production capacity so fast, but when looking at the opportunity before it, Aurora Cannabis has, in my view, taken the right steps in preparing for the extraordinary growth opportunities before it.

As the regulatory environment in the U.S. and other countries get clearer, and Aurora understands the parameters of the industry in various markets, it will be able to leverage its market-leading cannabis supply across numerous verticals.

And as good as all of this sounds, it is still in the early stages of forging partnerships with companies in a variety of industries, representing a variety of products. This has been a point of contention by analysts and pundits, who were looking for Aurora to make a deal with a giant firm in one industry. It has differentiated itself by looking for numerous partnerships that will result in it maintaining control of the company; something I find very beneficial as a shareholder.

The way to view Aurora Cannabis is to understand it will continue to compete in the segments of the cannabis market mentioned in this article, with recreational pot being the major contributor to revenue in the near term, with CBD wellness and medical sales increasingly becoming a larger percentage of revenue.

With Canadian recreational demand not being supplied fully at this time, the company may experience a quarter or two where recreational pot will increase as a percentage of sales, but further out there is no doubt medical cannabis will be the major growth catalyst.

When combined together, the growth story of Aurora looks massive. It's simply a matter of matching cannabis supply, easing and clarity of the regulatory environment, and research providing legitimate solutions to various symptoms of diseases with limited side effects together. Once that happens, the performance of the company is going to positively surprise even its worst critics.

Disclosure: I am/we are long ACB. 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.