Aurora Cannabis (ACB) is a licensed cannabis producer serving both the consumer and medical marijuana markets. The company is headquartered in Edmonton, Alberta, Canada, and is dedicated to improving people’s lives.
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I am neutral on Aurora Cannabis as the attractive valuation multiple and growth potential are offset by the regulatory risks facing the stock and Wall Street’s bearishness. (See Insiders’ Hot Stocks on TipRanks)
Strengths
Aurora Cannabis is the number one Canadian limited partnership company in global medical cannabis. The company showed a revenue growth rate of 9% from the previous year and is on track with its business transformation plan.
The company also has a strong portfolio, thanks to its various acquisitions, including that of Pedanios GmbH, the largest wholesale distributor, exporter, and importer of medical marijuana in the European Union.
Recent Results
In its fourth-quarter financial results for 2021, Aurora Cannabis reported net revenue of $35 million in its Medical Cannabis division, which is a 9% increase from the same quarter of 2020. The increase was attributed to the continued growth in the International Medical business.
The Medical Cannabis division saw an adjusted gross profit margin of 68% compared to 64% in the fourth quarter of 2020. The increase was due to an overall decrease in production costs after the company closed down non-core facilities as a part of its business transformation plan. In addition, more revenue was generated from higher-margin international sales.
Aurora Cannabis reported net revenue of $19.5 million in its Consumer Cannabis division, which showed a decrease of 45% from the $35.3 million generated in the fourth quarter of 2020. The lower revenue was attributed to lower consumer demand as a result of the COVID-19 lockdown.
However, net revenue showed an 8% improvement from the third quarter of 2021. The increase was primarily attributed to the company completing its fixed sales force transition to Great North, as well as a $2.5 million reduction in actual net returns, provisions, and price adjustments as the company finished its product swap initiatives to replace low-quality products with higher potency ones.
The adjusted gross margin in this division was 31% as compared to 36% in the same quarter of the previous year.
The company had a strong balance sheet when the fourth quarter ended, with $440.9 million cash on hand as well as a $404.3 million improvement in working capital. Aurora Cannabis also revised its annual cost-saving guidance from $60 million to $80 million.
Valuation Metrics
Aurora Cannabis’ stock looks attractively priced at the moment, as the stock price has pulled back sharply this year. The EV/Revenue ratio is 7.3x compared to its historical average of 13.5x.
Furthermore, its EBITDA margins continued to improve from -133.3% in Fiscal Year 2020 to -78.8% in Fiscal Year 2021. It is expected to improve to -10.4% in Fiscal Year 2022 and finally turn positive in Fiscal Year 2023 at 4.2%.
Wall Street’s Take
Turning to Wall Street, Aurora Cannabis has a Moderate Sell consensus rating, based on five Holds and four Sells assigned in the past three months. The average Aurora Cannabis price target of $6.09 implies 16.6% downside potential.
Summary and Conclusion
Aurora Cannabis operates in a rapidly growing industry that faces significant regulatory uncertainty. While the stock price looks attractive relative to historical multiples and the business is on track to turn profitable within a few years, Wall Street analysts are overall quite bearish on the stock given the regulatory risks plaguing the industry.
As a result, investors might want to be patient and wait for a further discount in the stock to compensate for the significant regulatory uncertainty in the investment thesis.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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