Aurora Cannabis: The Light Keeps on Fading Into the Distance

Heading into Aurora Cannabis’ (ACB) March quarter earnings (F3Q), with conditions known to be rough in the Canadian cannabis market, Needham’s Matt McGinley had “low expectations.” The analyst did not anticipate the company would show any “operating and cash flow improvements” in the quarter.

However, turns out McGinley was being a tad optimistic.

“This quarter was quite a bit worse than we assumed, with revenue (18.5)% QoQ, adj. EBITDA declining to $(24.0)mn or (44%) of sales, and $(70mn) in FCF losses,” the 5-star analyst said. “The only business line that held up in 3Q was the Canadian medical business with flat QoQ revenue, while int’l medical, US CBD, and the crucial Canadian adult-use markets all posted substantial sequential declines.”

So, what’s going on at Aurora? McGinley has his own take on “the big picture.”

Although for the last 7 quarters Aurora has never generated more than $70 million in revenue, as production underwent “substantial restructuring” and G&A (general and administrative) expenses were slashed to $42.5 million, McGinley felt that if the company could keep GM (gross margin) rates over 50%, all it would need is revenue of $85 million “to reach EBITDA breakeven.”

However, at $55 million, revenue was not even close to that figure, while GM only came in the 40%’s.

“We aren’t even sure it is in the 40%’s,” McGinley further said, “Because every quarter there are inventory write-offs and returns that we’d like to think are 1x, but don’t really seem to be.”

What’s more, the adult-use market is proving to be a bit of a struggle for Aurora, and due to COVID, the much talked about portfolio reset “hasn’t reset,” whilst provincial distributors are also much more “discerning with slotting.” Additionally, Canadian marketing restrictions make it very difficult to gain brand traction.

Against this backdrop and the ongoing restructuring process, EBITDA hasn’t really gotten any better. Since F18, FCF losses have reached $1.8 billion, and in F21, Aurora lost $266 million.

Here is where Aurora’s famous share dilution tactics come into play.

“This has been funded with equity issuance where the share count has gone up by 5x since F18,” McGinley wrapped up, “And ACB is reloading with another US$300mn ATM program (just in case…)”

Down to the nitty gritty, what does it all mean for investors? McGinley rates ACB shares an Underperform (i.e. Sell) without suggesting a price target. (To watch McGinley’s track record, click here)

The rest of the Street’s view hardly paints a brighter picture. The stock’s Moderate Sell consensus rating is based on 6 Sells and 4 Holds. The analysts expect the share price to stay rang-bound in the coming months, given the average price target currently stands at $7.14. (See Aurora stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.