Aurora Cannabis (ACB) is one of the major players in the Canadian pot industry, but along with many other Canadian cannabis stocks, the hype has failed to deliver profits and meet investors’ expectations. As a result, the share price has collapsed by over 90% since early May last year.
On Monday, Aurora enacted a reverse stock split to comply with the New York Stock Exchange’s regulations. Prior to the 1-for-12 split, the stock was trading for $0.66, and priced under a dollar for over two months, therefore no longer meeting the required listing criteria.
The split, though, does not increase the company’s value. That will happen, if it can win back investors’ confidence, starting with this week’s (May 14) FQ3 earnings report.
Looking ahead to the statement and further down the line, Needham analyst Matt McGinley argues that in order to restore investors’ faith and achieve its goal of becoming profitable by F21, Aurora needs to deliver on several fronts. Over the next two quarters, SG&A (selling, general & administrative) needs to be trimmed by over 50% to $45 million and gross margins need to be kept over 50%. Additionally, to meet positive EBITDA loan covenants, Aurora must increase revenue by 33% to $90 million.
“By 2H21,” notes McGinley, “It would need ~$120mn in revenue per quarter using the same cost assumptions to make its $20mn quarterly EBITDA covenant.”
And while the current macro environment exerts additional pressure, the company’s problems run deeper and require swift action to keep the business moving forward.
The analyst concluded, “Disruptions related to COVID-19 are just an additional external complexity for an industry already struggling to reset amid slow market development and excess cultivation capacity in Canada. Reported cash balances imply some improvement in the rate of FCF burn in 3Q, but we believe substantial improvement is required over the next two quarters for this business to sustain itself.”
McGinley reiterated a Hold rating on Aurora shares, yet hasn’t set a price target. (To watch McGinley’s track record, click here)
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