Shareholders of Aurora Cannabis (NYSE: ACB) were dealt an unexpected blow this week as the pot company’s disappointing earnings report thwarted hopes of recovering the recent losses. The Canada-based firm currently looks to achieve profitability by widening the reach of its premium products, rather than expanding the overall market share.
Of late, the marijuana industry has been on the path of innovation, marked by the launch of vaping devices, cannabis edibles, and CBD-based products.
Related: Aurora Cannabis Inc. Q4 2020 Earnings Call Transcript
Aurora’s stock slipped to a four-year low on Tuesday evening, paring most of the pre-earnings gains. Definitely, this is not the right time to invest in ACB, though market watchers project a decent recovery later this year. Since improvement is on the cards before the next earning, it makes sense to hold and keep an eye on the stock until then.
The Pot Bubble
Last year was a challenging period for the legal marijuana industry, with widespread stagnation adding to fears that the bubble has burst. In the case of Aurora, the weakness in the core cannabis business, the main revenue source, was more pronounced in the second half. With several new players out there, the market is probably getting a bit too crowded. From the investors’ perspective, most cannabis stocks were overvalued at some point relative to their not-so-impressive earnings performance.
Elaborating on the fourth-quarter outcome and global expansion plans, Miguel Martin who assumed the role of Aurora’s chief executive officer this month said, “I strongly believe that the long-term outlook for cannabinoids is very exciting, both in THC and in non-THC variance and I think Aurora is uniquely positioned to realize opportunities in both segments. We’re seeing the level of interest globally and medical systems grow and Canada’s consumer market is returning to a nice pace of growth.”
Volatile Scene
All along, the market has been bullish on the prospects of medical and recreational marijuana, the demand for which remained elevated as more and more US states legalized the products. For the companies, in the long term, it might not be a smooth ride in the country where marijuana is still illegal at the federal level. The main weak point of Aurora’s latest quarterly report is the muted outlook for its core cannabis business.
Meanwhile, efforts are on to streamline production, while optimizing the yields and potency. The double-digit decrease in operating costs is reflective of the effectiveness of the company’s cost-reduction initiatives. If maintained, the drive would mitigate the need for additional capital in the long run. In another move to save cost, the company recently quashed its research tie-up with sports company UFC. Despite all that, the goal to achieve positive EBITDA by the second quarter looks too ambitious.
Q4 Debacle
The company recorded a huge goodwill impairment charge related to the reorganization of underperforming assets, resulting in a loss from operations of about C$1.86 billion in the fourth quarter. It was sharply wider than the loss recorded in the fourth quarter of 2019. Almost all operating metrics pointed to a downturn and the top-line was no exception, which slid 5% quarter-over-quarter to C$72.1 million. The numbers also missed the Street view .
Premium Push
The stakeholders would be curious to know where the company is headed in the current fiscal year. Giving them fresh hopes, the management’s post-earnings discussion was centered around expanding into premium brands from the value flower brands. As the company enters the new fiscal year, Martin has a tough task at hand.
We already have a collection of great premium brands, Aurora, San Raf, and then Whistler as a super-premium offering. So we need to emphasize all of our strong premium brands to balance out the total offering to our consumers. We also intend to better position these three premium brands across various formats to foster greater brand visibility and provide greater choices to the consumers.
Miguel Martin, chief executive officer of Aurora CannabisRead managements/analysts comments on quarterly reports
Investor sentiment was further dampened by the weak outlook for the first quarter, which is in line with the management’s initial projection. The stock opened Wednesday’s trading at $5.80, after losing a quarter of its value since the previous close, and the downtrend continued throughout the session.