Aurora Cannabis will be reporting its financial and operational results for the first quarter of 2020 on November 14, 2019 after hours.
17 Analysts are providing coverage on Aurora, and the majority is split between a “hold” (7 analysts) and a long term “buy” (7 analysts) with a consensus average price target of $8 CAD.
The estimated revenue forecasted in the upcoming quarter (Q1 2020), is approximately from $90m to $98m Canadian Dollars. This is a shocking indication that there will only be a net revenue change of 1%- 4% in comparison to Q4 2019 and a 233% YoY from Q1 2019 ($29.6m). It seems that analysts are illustrating that net revenue and gross margins will be flat.
Key to success: Steady Gross Margins and Reducing Costs
Though analysts have given low revenues estimates, Aurora is expected to beat in Q1 2020 based on the progress of steady Gross margins that it has maintained in the fiscal year of 2019.
|Financial Results||Q4 2019||Net revenue %change Q4-Q3||Q3 2019||Net revenue %change Q3-Q2||Q2 2019||Net revenue %Change Q2-Q1||Q1 2019||Net revenue %Change Q1-Q4||Q4 2018|
Lowering the estimates is making the case easier for Aurora to beat on earnings. If Aurora is promising to deliver consistent gross margins and positive net revenue Q-to-Q, then Q1 2020 should reveal an estimate revenue in the range of $118m-$147m. Which is approximately an increase of net revenue % range of 20%-50%.
It doesn’t seem that aurora would have a problem achieving the estimates and expectations that has been set by analysts or even a net revenue of $100m+. In my opinion, analysts may have set the bar to0 low for Aurora to beat. If Canopy and Aurora beat on earnings, the sector is more than likely to rally.
Cannabis 2.0: Edibles, Beverages, & Vapes
It is unlikely that true valuation of Cannabis 2.0 products will be revealed until sometime Q2-Q3 2020, because access to edibles and beverages will be available to the market mid-December 2019. Q2 earnings will be representing for the months ending December 31, 2019 (which will possibly include only 1-2 weeks of edibles). Patience is required for Cannabis 2.0 according to Bethany Gomez from Brightfield Group:
“It’s important to ensure that expectations are in line,” said Bethany Gomez, managing director of the Brightfield Group, a market research firm specializing in the cannabis industry. “The rollout is always a lot slower than people are expecting it to be …we’re not going to see the market change overnight — even 60 days from [today].“
We will likely get a good idea of how much Cannabis 2.0 can contribute to revenue sometime Q3 of 2020.
MKM Partners analyst Bill Kirk is Bearish on Aurora Cannabis
As of November 11, 2019, MKM have lowered their quarterly estimates on Aurora and Canopy, and they expect aurora to hit $92m revenue. He concluded this due to three reasons:
- Inventory is piling up and being held by provinces (restrictions on access to cannabis). Resulting in weighing on shipments from manufacturers;
- Prices are falling; and
- prices are being reduced to compete. It is believed that reducing prices will not help shift product because legal weed is still considered more expensive than black market product.
Opposing analysis to MKM Partners’ analyst Bill Kirk
- Inventory has been rising due to: (1) restrictions, from Ontario and Quebec and other provinces; and (2) preserving inventory for their product line in Cannabis 2.0 [Edibles: concentrates, gummies, chocolates, baked goods and mint and vapes], according to the latest annual general meeting presentation held on November 8, 2019.
Ontario currently has 25 retail stores and it will be 75 stores end of the year. Seaport Global analyst Brett Hundley stated that the slow roll-out of stores:
“creates a real problem for Canadian Licensed producers, because they’ve expanded rapidly with cultivation and production facilities and have nowhere to go”.
This will no longer be an issue in Ontario as Premier Doug Ford and the province of Ontario have agreed to ease the restrictions after receiving a letter (Dated: Octobe 28, 2019) from the Cannabis Council of Canada outlining the issue of access to cannabis. This is a huge win for the Canadian retail stores and Canadian Licensed Producers (LP’S).
“Ontario says it will allow cannabis retailers to sell products online or over the phone for in-store pick-up. The government announced the proposed changes in its fall economic statement today, saying they will decrease waits for access to legal cannabis.
The Progressive Conservatives say the change is part of a promise to lift the cap on the number of cannabis stores and combat the black market.
Rules will also change to allow licensed producers to have retail stores on each of their production sites to further increase access. The number of legal pot outlets in Ontario is increasing from 25 to 75 this fall.
The government says it will amend legislation to make the changes but has given no immediate timeline when they will take effect.”
- Prices per a gram have fallen due to competition in the legal market and the black market. The LP’s that currently have high costs will not survive on the long term.
Aurora has established overall low production costs in fiscal year of 2019 and in their latest financial results ending September 30, 2019 (Q4 2019) they have recorded cost per a gram at $1.14 CAD.
The key objective for Aurora, according to their recent conference call, is to continue reducing their costs below $1 per a gram.
They have successfully reduced costs of production and sales per a gram for a combined total of $2.61 CAD in Q4 2019. This is in comparison to Q3 2019 at $3.47 CAD a gram.
- The Black market has always been a competition from the beginning, MKM partners analyst Bill Kirk is strongly focusing and emphasizing on this point, which is very weak. All LP’s and privately-owned cannabis retail stores are facing the same problem. If they are of the opinion that legal market cannot keep up with the black market, then it is fair to assume that they are indicating that legal market has no chance. Competing with the black market shouldn’t be a problem.
Ross Healy of Strategic Analysis Corp
Healy quoted that a stock that hits its book value should be worth a second look. “I know nothing of the retail ability of Aurora management but the stock is cheap enough that I don’t think that I’d want to be short this stock anymore. It might go lower but the stock is actually beginning to look attractive. It’s like, ‘Book value? I’ll have some of that,’” Healy says.” (Cantechletter)
The Cannabis legal market has already managed to capture a big portion of the market. According to New Cannabis Ventures, public cannabis company revenue & income tracker (top ranking generated revenue), US Cannabis companies reported a combined revenue of $724.4m USD in the last reported quarter (as of November 11, 2019).
About the Author
About Andro George, Andro is in the legal and political profession, a writer, researcher, business consultant, and an analyst in the legal and business sector with a Bachelor of Law from the University of Sunderland. His interests range from law and politics to governance, social justice, business, technical and fundamental analysis and Securities. Majority of the business consulting experience is within the pharmaceutical industry.
Full Disclosure: I have long positions on Aurora Cannabis, I am not receiving compensation for it . I wrote this article myself, and it expresses my own opinions. I have no business relationship other than shareholder with any company whose stock is mentioned in this article.
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4 Aurora Cannabis 2019 Annual Report (pg.40)