Marijuana giant Aurora Cannabis (ACB) is scheduled to report its Q2 earnings on Monday after the bell. Last month, the company scaled down its revenue guidance for the second quarter, which failed to beat analyst estimates. However, Aurora’s stock price had shot up above 50% this year closely on the heels of the Whistler Medical Marijuana acquisition closed in mid-January.
Aurora is announcing the quarterly results for the first time post the legalization of recreational weed in Canada. It would be interesting to see for insights from the firm that this had given any fillip to the headline numbers.
The weed firm now expects Q2 revenue to be in the range of CAD50 million to CAD55 million, which is CAD12 million lesser than what analysts were expecting. When compared to the prior year period, revenue is expected to jump above 327% and over 68% sequentially. The significant spike in revenues is primarily due to the contribution from its acquisitions.
It’s a no-brainer that Aurora follows “Growth through acquisition” strategy. Since late 2016, the cannabis firm had done 16 acquisitions to foray into new markets and widen its reach both horizontally and vertically within the weed market. In addition, it has entered into strategic partnerships with 10 firms to keep a tab on new products and innovations, which would complement its existing product offerings.
The hunger for growth has its own perils. Investors are worried about the sudden spike in the number of shares outstanding due to the shopping spree which remains as a headwind for the firm. With increasing competition, the company needs to turn its focus on products which would bring in better margins to thwart any pressure on the margin front in the long-term. In addition, the company can look for partnerships which would provide funding for growth strategies.
Even though Canada has legalized the use of recreational cannabis, the potential for growth remains limited as too many players are targeting the market resulting in oversupply and illegal cannabis providers making the life tough for Aurora and peers. The other markets where weed sales are legalized like Germany, the UK, Uruguay, and Thailand are yet to mature.
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US Market Hopes
Aurora and its peers are pinning its hopes on the US market. When it comes to weed usage for medical purposes, more than 30 states in the United States has now approved it. District of Columbia and 10 states have given nod for consuming weed for recreational purpose. As more states are opening up the market for cannabis usage, the federal laws are yet to be tweaked. Still, usage of marijuana for any reason is considered as illegal.
There is a lot of optimism now prevailing that the entire US market would open up for weed consumption for medical and recreational purpose, which would not only help Aurora but the entire cannabis industry. With the global marijuana market pegged at $200 billion ($70 billion for the medical weed market), it is estimated lion’s share of this is going to come from the US market.
Investors also would be watching for updates from the management on its plans to become EBITDA positive starting in Q4 2019. If Aurora achieves this feat as per the plan, investors would be vindicated for the valuation it commands now.