Cowen analyst Vivien Azer was spot on with her analysis with regards to Aurora Cannabis Q1 2020.
Summary: The key take of Vivien Azer (Cowen Analyst)
- Aurora has more cash to maintain its operation;
- Aurora has slowed down capital spending [halting constructions and expansions (i.e.capital expenditures)];
- Aurora has increased in medical revenue & is now considering developing a white label business since they are selling in bulk (wholesale);
- Aurora has maintained strong margins & achieved its longstanding goal by achieving costs per a gram below $1 (C$0.85).
Vivien azer mentioned that: “Management was (appropriately) cautious to issue guidance for when the company would reach EBITDA profitability, and which we do not anticipate until at least the back-half of the year, at the earliest.”
She has expectations that sometime in the second half of the year 2020 that Aurora would be Positive EBITDA (interpreting this with caution, sometime between June 2020-December 2020).
Here is my independent analysis and opinion on Aurora Cannabis (with the assistance of the Report from Cowen on Aurora)
Majority of analyst’s were very negative on Aurora in Q4 2019 because of 3 concerns:
- Aurora’s Cash problems;
- Aurora’s spending habits (capital expenditures);
- The convertible debenture due in the near term (which i commented on and said 1 of 3 consequences will happen (either convert to shares, extend, or pay it come march 2020).
All of these problems were addressed in the conference call following the results of Q1 2020. Cowen mentioned 2 points that are critical for Aurora that I have strongly been focusing on:
- Aurora reporting losses not because of their business operations, but because of their spending habits on construction and expansion (capital expenditures). Once their constructions and expansions are complete these costs will not recurring. On the long term, aurora will no longer have big costs.
- Aurora is continuing to deliver strong gross margins and lowered the cost of production per a gram, Vivien Azer stated
Aurora Q1 Financial Report and Cost Per Gram
” Aurora reached one of its longstanding goals on cash costs per gram, delivering C$0.85 vs. C$1.14 in Q4 2019. Given its leading margin and cost structure positions, the company is looking to leverage its scale, which provides FUTURE FLEXIBILITY TO MAINTAIN PROFITABILITY IN THE EVENT OF PRICE DEFLATION.“
Yes, Aurora did not beat on revenue and this was something I was expecting (the consensus was above $90m). However, there were a lot of positives to take away from Q1 2020 that point to long term growth and profitability:
- Strong and steady gross margins (above 50%);
- Increase in Production (Q1 2020, Aurora produced 41,436 kilograms of cannabis as compared to 29,034 kilograms)
- Average net selling price of cannabis increased by $0.36 per gram from $5.32 (Q4 2019) to $5.68 (Q1 2020).
- Active medical patients have increased (the international medicinal marijuana market is growing every year)
- Costs per a gram have been reduced (C$1.15 in sales) + (C$0.85 in production) = $2 total Costs per a gram. They have hit their target cost per a gram, which was below $1 a gram. Something not everyone thought they would hit.
- they have halted their construction (this is not permanent) resulting in preserving cash. A lot of marijuana companies have proceeded to this method, while some had to sell assets (Hexo and Canopy are examples that come to mind).
Lowering the costs of production and sales should be focused strongly on as the competition rises. This is something I have argued plenty of times in my posts and articles. In the case the competition increases (whether black or legal market) Aurora will be able to compete at net selling $3-$5 a gram. Other Marijuana companies may not be able to keep up because their cost per a gram and cost of sales combined are higher than Aurora and are closer to the black market purchase price per a gram (Approx. $5).
Wholesale “white label” point was never brought up, because this is something that is common that licensed producers will eventually turn to when they hit maximum capacity, and when there is an oversupply in the market.
In conclusion, I stated in my previous articles that Aurora is short term bearish, but looks strong long term. The steady ongoing growth, low cost productions and high gross margins support long term profitability.
Summary of Aurora’s growth and why they are strong
(1) Prior to legalization, the focus on marijuana companies target was whoever had the biggest capacity, they would dominate. This is something that aurora has promised and is so far delivering on;
(2) Canopy was favored to dominate in the Canadian Recreational market, while this is true, Aurora didn’t want to settle for being #1 in the Canadian market, but rather has focused on being #1 in the international medical market and to build itself a strong presence to be a global leader. They now have access to sell marijuana in 25 countries and they are having a strong presence in the international market.
(3) Biggest capacity alone is not enough, you need distribution channels to sell and be dominant on a global scale. This is something aurora has delivered on as they have distribution channels to Europe, Australia, and South America and indirect channel built to the US but has not come online yet.
(4) Aurora delivered the highest the net revenue generated in Q4 2019. This was something Aurora beat Canopy on and this was not expected. So they are delivering strong revenue and this is expected to continue on the long term as they aim to hit $130m revenue (according to the conference call held on November 14, 2019). So stronger revenue to come. In the mean time, according to latest Curaleaf financial quarter, they currently hold the top spot for most generated revenue in a quarter.
Accomplishment checklist for Aurora
- Top revenue – Aurora has shown signs of being capable of obtaining top revenue. Managed to report top revenue generated in Q4 2019. Currently competing for top spot.
- Biggest capacity – Aurora is on track to have the biggest capacity
- lowest cost production – has established their goal (below $1)
- General Costs (needs improvement but has demonstrated progress according to the last conference call)
The Marijuana sector was always accused of being a bubble, that they will not generate revenue, that there will be an oversupply and that it will all burst and have no value (like the dot com bubble).
Every time Aurora was put under the spotlight to achieve a certain task, they delivered.
- They constructed;
- They cultivated & produced, and
- They generated revenues.
Now their key focus is to lower costs; and turn profitable.
Full Disclosure: I have increased my long position on Aurora Cannabis. I am not receiving compensation for this article. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any companies or public security companies other than being a shareholder with any company whose stock is mentioned in this article.
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