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Finally, Some Good News for Aurora Cannabis – The Motley Fool

In case you haven’t noticed, it’s been tough to be a marijuana stock investor over the past 10 months. Following a blazing-hot first quarter that saw over a dozen pot stocks gain in excess of 70%, cannabis stocks have spent much of the past 10 months in a steep downtrend, with some pushing to multiyear lows.

This weakness has been precipitated by regulatory-based supply issues in Canada, exorbitant tax rates in a number of recreationally legal U.S. states, and a resilient black market presence throughout North America that’s thrived off of the industry’s early stage miscues.

Investors have been looking for any sort of good news to latch onto, and Aurora Cannabis (NYSE:ACB), the undisputed most-popular pot stock, looks to have finally provided such news on Monday, Feb. 3.

A dried cannabis bud lying atop a doctor's prescription pad.

Image source: Getty Images.

Is Aurora’s international business (finally) about to pick up?

First of all, the company announced that, following a two-month suspension of medical marijuana sales in Germany, its products are once again available for sale.

For those who may not recall, Aurora announced in late November that its medical pot products would be unavailable while health authorities conducted a review of the company’s cannabis production process. More specifically, German pharmacies noted that the review had to do with a method Aurora used to ensure the shelf life of its cannabis flower, according to Marijuana Business Daily. Although the company stood behind the quality of its product and its manufacturing process, this was just another pain in the neck for investors toward the end of 2019. 

However, considering Germany is probably the most lucrative medical cannabis opportunity in the European Union (EU), the ability to once again sell medical cannabis is a clear step in the right direction. 

What’s more, Aurora Cannabis also, separately, announced that it had received EU Good Manufacturing Practice certification for its Aurora River facility. If the name doesn’t sound all too familiar, that’s because this campus used to be called Bradford when MedReleaf owned it. The Bradford facility offers 28,000 kilos of peak annual production capacity, and it marks the third of the company’s 10 domestic cultivation campuses to get the thumbs-up from EU regulators. With Aurora River now receiving the A-OK from a quality standpoint to export to the EU, Aurora’s ability to send cannabis to international medical marijuana markets has grown by more than 230%. 

A person holding cannabis leaves in front of a globe of the Earth.

Image source: Getty Images.

This approval is particularly important because Aurora Cannabis has arguably banked on overseas markets more so than on any other marijuana stock. Yet, to date, international sales have been paltry, with only $5 million Canadian in recognized international revenue in the fiscal first quarter. With higher-margin extract sales somewhat recently commencing in some overseas markets, Aurora Cannabis may finally have an opportunity to realize dividends from its overseas expansion strategy.

One step forward, but a mile to go

While this represents an important step forward for the company, it’s also just one step of many it’ll need to take to prove to Wall Street that it has long-term potential.

For instance, Aurora Cannabis spent aggressively to up its production capacity and supply chain capabilities, and it looks to have seriously compromised its balance sheet in the process. Despite ending the fiscal first quarter with what seems like a sufficient amount of cash, cash equivalents, and marketable securities on hand (almost CA$192 million), this could prove insufficient, considering its existing borrowings and its ongoing operating expenses. Even with Aurora Cannabis halting construction at two of its largest cultivation farms and putting another 1 million-square-foot greenhouse up for sale, there are no guarantees that it has the capital to survive long term.

Furthermore, the only way Aurora has easy access to capital right now is by selling its stock. Since June 2014, the company’s share count has ballooned from 16 million to probably close to 1.1 billion. Such mammoth amounts of dilution have been difficult for investors to absorb.

This overspending has also driven up the company’s goodwill. Although goodwill is pretty common following an acquisition, Aurora’s CA$3.17 billion in goodwill accounts for 57% of its total assets, as of the end of September. This figure suggests that Aurora grossly overpaid for the companies it purchased and that there’s little hope of recouping a significant portion of this goodwill in the future. At this point, a future writedown might actually be larger than Aurora’s current market cap.

A large cannabis dispensary sign in front of a retail store.

Image source: Getty Images.

There are other concerns beyond just the company’s balance sheet. The noted supply issues in Canada, such as Ontario’s inability to open an adequate number of dispensaries, will not be an overnight fix. Thankfully, Ontario is abandoning its lottery system in favor of a more traditional retail licensing system. Nevertheless, it’s going to take numerous quarters before the most populous province has a sufficient retail presence. That means ongoing supply bottlenecks for dried flower and high-margin derivatives for Aurora and its peers.

It’s also highly unlikely that profitability is anywhere on the horizon. With sales growth stymied in Canada and international sales generating just peanuts of their envisioned potential, Wall Street doesn’t envision Aurora Cannabis delivering a recurring profit until at least fiscal 2022 (Aurora’s fiscal year ends June 30).

There’s no doubt that Aurora Cannabis’ shareholders needed something good to happen, and Monday’s announcements hit the spot. But on a big-picture basis, Aurora still has the look of a company that’s unproven, and therefore potentially dangerous to investors.

Written by homegrownreview

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