- Lots of questions have come up about the validity of cannabis companies.
- Questionable analyst ratings have sent sector stocks tumbling.
- This was never an overnight industry yet people are missing opportunities left and right.
Marijuana stocks have been something that I've followed from day one. Many of the articles I've written were a bit ahead of their time especially when it comes to certain product developments and proposed deals:
Just to name a few. I'm not here to toot my own horn but to show that it doesn't take a Wall Street analyst to tell you to pay attention to certain trends. However, this is a very risky industry and there are still many unknowns. So first, you really need to decide if marijuana stocks are right for you or not. Besides the big dogs in marijuana, there are still many pot stocks that are considered penny stocks and they carry with them other levels of risk to reflect on.
Given the state of the cannabis industry right now, I couldn't stay quiet. The analyst report delivered by Stifel has shaky ground to stand on in my opinion. Though Aurora (ACB) did shoot itself in the foot, there are a few things to pay attention to right now.
1. Revenues for most leading cannabis companies are increasing
2. Though many are not profitable yet (ACB specifically), losses are decreasing dramatically
3. Canada will be opening up to cannabis derivatives this year (further details on this)
Marijuana Stocks, Increased Revenues & Decreased Losses
Let's keep Aurora as the example here. It's no secret that the company missed on its own guidance so shame on them for that. But to go as hard in the paint on them and say they're "done," is most likely a bit of a stretch. So let's go to the tale of the tape:
Earnings have increased every quarter since March of 2017. In the beginning, we saw March to June revenues jump only slightly, but after that, Aurora's revenues have increased at a quarter-over-quarter rate of at least 15%. The most recent quarter, 2019 increase over the previous quarter results was over 50%.
You can make your own assumptions about what we see for Q1 2020 figures coming next month. But I will say that the company did express continued increased production for the quarter.
In Q4, we continue to invest in the corporate infrastructure and talent required for expansion and growth of market share globally. The increase in SG&A expense compared to prior periods was primarily attributable to increased shipping and fulfillment costs related to higher revenues in preparation for the launch of new products including product development and branding development, which includes our UFC research initiative.- Glen Ibbott -- Chief Financial Officer, Aurora Cannabis
But we can't just look at the revenues because as you know, the issues here are the company's losses as well as its "ability" to establish itself. In this case, the adjusted EBITDA loss has shrunk from -$45.5 million for the quarter ended Dec 31, 2018, to just -$11.7 million in this latest quarter.
Also, consider that it was able to do all of this as its average selling price fell by more than C$1 per gram in the fiscal 4th quarter. And as we see that most of the company's consumer sales came from the dried flower, it's obvious considering that Canada has no derivatives business just yet.
The October Effect
This leads me to my next point and one that I referenced earlier. Canada will be opening the doors to cannabis derivatives in October. Now, before you jump in and say that this is likely a non-event because the US is the focus, understand the dynamics of the cannabis industry.
California, for example, has a larger consumer base that Canada. Yet when Canada went fully legal, this event had, in my opinion, a much larger echo across the industry. That's compared to California going fully legal.
This isn't a tit for tat discussion in marijuana. If an entire country is going to do something like Canada has and is once again about to, eyes tend to turn toward the sector. At this point, the ticking time bomb starts to hit the market running with cannabis extracts, waxes, drinks, etc. and likely, it will begin producing fruit from partnerships with mainstream beverage companies as well. We've seen Molson Coors, Constellation, and even Arizona Iced Tea set up deals in advance of this industry event.
But I do agree, the US will be the new frontier. With it will come its own set of challenges. However, with a company like Aurora, there are several moving parts to keep in mind heading into its next fiscal year.
Expansion & Growth
Right now Aurora operates across 5 continents and in 25 different countries. It also has 15 different cannabis production facilities either currently producing or under construction to meet EU GMP standards. In total, the company's facilities could have the capacity to produce upward of 625,000 kilograms when all currently contemplated facilities become fully operational.
"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. The Company expects adjusted EBITDA to continue to improve in the future due to expected revenue growth, improvements in gross margin and prudent SG&A growth." - Company Release
Right now, as eyes turn to the US, Aurora has already begun to extend its reach through subsidiaries like Australis Capital. According to a public statement, "Australis will identify and invest in U.S. cannabis and real estate assets. Investments may include and are not limited to equity, debt or other securities of both public and private companies, financings in exchange for royalties or other distribution streams, and the possible acquisition of certain entities."
Did Aurora shoot itself in the foot by boosted guidance it didn't hit? Yes. But are they and other marijuana stocks doomed? In my opinion, no. You have to remember that even though the industry is huge right now, it's still a very young sector. Really, since 2014 have we been able to monitor companies in the space.
“Analysts in the space have been notoriously off the mark in the past year & investors need to take them with a grain of salt," said Jason Spatafora, The Wolf Of Weed Street & Co-Owner of MarijuanaStocks.com in a statement to Benzinga. "As for Aurora, while I don’t hold the stock I do hold $6 call options as a means to limit capital exposure. If there’s one thing I stick to as someone that has traded this sector since the beginning, it’s that the fall prices are usually much better than the summer. ACB has been the beneficiary of that since 2016."
Though there have been some much-to-be-desired aspects of the market like full US legalization, the fact remains: Cannabis continues to grow at breakneck speed, the global market continues to expand, and the United States is slowly coming into light with things like the Farm Bill and state-level legalization.
Analyst's Disclosure: I am/we are long ACB.
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