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Marijuana giant Aurora Cannabis (NYSE: ACB) reported its fiscal third quarter of 2021 results last week. As investors were left unimpressed with its quarterly results, ACB stock is down over 6.5% in early market trading on May 14.
In Q3, Aurora Cannabis sales were down 19.5% year over year and 17% on a sequential basis at CA$55.2 million. After accounting for returns and provisions, cannabis net revenue was down 20.8% compared with the prior-year period.
The company attributed this fall in the top-line to a shift in mix towards its medical marijuana business. Aurora Cannabis’ net selling price per gram of dried cannabis rose to CA$5 per gram, up from CA$4.64 in Q3 of 2020 and CA$4.45 in Q2 of 2021.
Its adjusted gross margin before fair value adjustments on cannabis net revenue was 44% compared to 43% in Q3 of 2020. The increase in gross margin was also due to the shift in revenue mix as medical marijuana products derive higher profit margins.
Aurora Cannabis reported an adjusted EBITDA loss of CA$24 million in the March quarter, significantly lower than its EBITDA loss of CA$49.6 million in Q3 of 2020. The EBITDA margin improvement was on the back of lower operating and R&D expenses. Analysts tracking the stock, expected sales to touch CA$68.8 million in Q3 while EBITDA loss was forecast at CA$10 million.
We can see the company’s massive revenue and EBITDA miss has led to the sell-off in ACB stock.
Aurora Cannabis continues to dilute shareholder wealth
Aurora Cannabis has been one of the worst-performing pot stocks in the last two years. ACB stock is now trading 95% below its record high, wiping off massive investor wealth. After accounting for its reverse stock split, Aurora Cannabis increased its outstanding share count from 1.3 million in June 2014 to 198 million in March 2021. This has resulted in significant shareholder dilution.
The company intends to file a prospectus in order to raise another $300 million in the future. It ended Q3 with CA$520 million in cash and Aurora’s management explained the proceeds of the equity raise will be used for acquisitions and expand operations in the U.S.
Aurora Cannabis initially forecast to post a positive adjusted EBITDA in the first quarter of fiscal 2021. However, two quarters later it continues to grapple with negative profit margins. During the earnings call, Aurora said its cost structure transformation remains a top priority and the company has identified between CA$60 million and CA$80 million in annual cost savings that can be achieved in the next 18 months.
Aurora claimed, “We anticipate that this initiative will not only allow us to meet our financial objectives while the Canadian adult-use market normalizes over the next several quarters, but will not have any effect on future revenue growth.”
What is next for investors?
Even if Aurora Cannabis manages to turn profitable on an adjusted basis it will be due to cost savings rather than revenue growth or via operating leverage. The company is losing share in an expanding market and its international sales are close to negligible.
ACB is now looking to focus on the medical marijuana business which means investors should brace for more decline in sales going forward. Aurora Cannabis accounts for around 20% of the medical marijuana market and aims to gain traction here.
While most cannabis companies will be impacted by the ongoing pandemic, investors should also note that the competition in the Canadian marijuana market has increased at a rapid pace.
In case marijuana is legalized in the U.S. Canadian cannabis producers might be able to access a much larger market. However, there are several multi-state operators in the U.S. that are already profitable and are growing revenue at an enviable pace.
Aurora Cannabis stock is currently valued at a market cap of CA$1.63 billion. Analysts expect the company to increase revenue by a measly 2.4% to CA$285 million in 2021 and by 38% to CA$395 million in 2022. However, they also expect Aurora to post a loss of CA$2.13 per share in 2021 and CA$0.65 per share in 2022.
Given ACB has 198 million shares outstanding total losses for 2021 are forecast at CA$422 million in 2021 and CA$128 million in 2022.
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