Aurora Cannabis: Why Production Capacity Size Does Matter

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

The market-leading production capacity of Aurora Cannabis is a major differentiator from all its competitors.

Some are trying to downplay the value of that competitive advantage.

Why it'll propel into being considered the new face of the industry at the expense of Canopy Growth.

production capacity of aurora cannabis a major moat against competitors source: seeking alpha

I've seen commentators and writers in the financial media recently state that the production capacity of cannabis companies isn't that important. Presumably these people must have taken positions in small pot companies that are getting hammered and will struggle to compete going forward.

As it relates to Aurora Cannabis (ACB), it's one of the main reasons it's going to be a long-term powerhouse in the cannabis sector, and will in my opinion, within a year or so be considered the top company in the industry.

Capacity and flexibility

One of the key benefits of large production capacity, beyond the obvious revenue growth, is the ability of Aurora to make different moves that will benefit its performance in the long term.

For example, I've heard and read a lot of those following the industry concluding the fact Aurora held back on selling some of its product in the last reporting period in order to ensure it had enough cannabis to serve its medical obligations, and also to prepare for the upcoming approval from Canada to sell edibles and other derivative products, as being a negative for the company. That doesn't make any sense.

The medium term potential will far exceed selling into the dried flower recreational pot market in Canada to temporarily gain a little more in sales, and should be considered a positive for the company, rather than getting some short-term sales to appease those with short investment time horizons.

Some time in early 2020, Aurora Cannabis will reach production capacity of approximately 625,000 kilograms annually, and that will provide it further flexibility to distribute its product across various parts of its distribution and supply chain, and also allocate it to testing and research without having to go outside the company to acquire it. This will save a lot of money over the long term.

The bottom line for production capacity is it reinforces the strong discipline company management already has, and provides it with options very few of its competitors will have at that level.

Also important is Aurora has enough assets to expand production capacity to close to 1 million kilograms annually if demand warrants it.

In the near future Aurora Cannabis will not only have the ability to hold back cannabis for strategic reasons, but it'll have enough product available to hold back and sell as well. I don't think any of its competitors can come close to that option at meaningful levels.

Taking a hit from the Canopy Growth debacle

While Constellation Brands and Canopy Growth have attempted to downplay the firing of co-CEO Bruce Linton and spin it as needing a new leader to move into the next stage of growth, in reality the surprise decision temporarily devastated the cannabis sector.

That is primarily because Bruce Linton was the face of the industry and Canopy Growth considered the future, long-term leader of the industry.

That has weighed on Aurora Cannabis since the market, because of it being so enamored with Linton and Canopy Growth, has projected the challenges associated with Canopy onto most of the competitors in the industry, even though in many cases they don't have the same issues Canopy does.

I've been on public record for a long time saying Aurora Cannabis was superior to Canopy Growth, and I don't think it's going to take long for that realization to be apparent to investors.

Conclusion

Aurora Cannabis has arguably the best management team in the business, and its consistent proof it is willing to take a disciplined approach to growth, even if it costs some short-term numbers, will pay off over the long haul.

Some may point out the aggressive growth trajectory of the company and the use of its shares to fund that growth, as an undisciplined strategy. But the truth is, even though it has diluted the stock for now, it's going to prove to be wise steps it has taken for its future performance.

It should be easy to see how Aurora's acquisitions made sense in light of its stated vision of being primarily a medical cannabis company. On the other hand, Canopy Growth has given mixed signals as to what type of company it is; the confusion came from the influence coming from Constellation Brands and conflicting visions for the company, which was also defending its own stock from the losses coming from Canopy.

As for Aurora, it is very close to wildly expanding its production capacity in comparison to all of its competitors, and with Canopy Growth now looking to cut losses, it will possibly take longer to reach its production capacity goals, allowing Aurora to widen its lead over Canopy within about six months.

In the end, don't believe anybody that says production capacity doesn't matter. In the hands of a expert management team like that of Aurora Cannabis, it's one of the chief differentiators it has over the rest of its competitors.

It has a lot more than that going for it, but the flexibility that comes with that much capacity allows it to leverage it at extraordinary levels that no one will be able to match for a long time, if ever.

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.