halbergman
Shares of Aurora Cannabis (NASDAQ:ACB) are down by more than 95% since three years ago. The marijuana cultivator is a shadow of its former self. Many of its cultivation and retail facilities in Canada were shuttered over the past few years to match its output capacity to the anemic demand in its core markets, with its operations shifting to focusing solely on its most profitable segments in a bid to keep the lights on.
With such a setup, it is unlikely that shareholders from that period will see their investments recover. But, while its challenges continue, there are a few signs that the worst is in the past, and that the future could be a bit brighter if a few green shoots continue to grow. In fact, for a certain kind of investor, it may even be approaching a buy point, so let’s investigate its status in more detail.
Is this business finally turning the corner?
In terms of Aurora’s sales performance, its quarterly revenue fell by 3.4% over the last five years, reaching CAD$64.4 million in its fiscal Q3 of 2024. Much of the decline was due to the collapse of the Canadian marijuana market, which itself was caused by a glut of supply far in excess of demand for cannabis after the country legalized the plant, among other issues. Since it expanded abroad in search of growth in medicinal cannabis markets, year-over-year top line growth has not picked up significantly, as shown below.
It’s this low-growth situation which constitutes the biggest reason not to invest in this stock. There is no reason to expect that its core medicinal marijuana market in Canada is going to experience a boom anytime soon, and the long-term appeal of competing in medicinal markets continues to shrink as recreational markets become larger and more common globally. Still, other longstanding stumbling blocks, like its debt load and operational inefficiency, are finally becoming more manageable due to management’s steady efforts. Plus, one of its core international markets is opening up a bit more, and it’s already positioned for success.
Aurora’s shares have been buoyed by recent news of cannabis policy reform in Germany and potentially elsewhere in the E.U. The company has a production facility in the country, and it claims to be the biggest provider to the private payer market, which it expects will now start to grow. It is reasonable to expect that its German segment will experience some additional sales growth over the next few years, especially if follow-on legislation expands on the foundation laid by decriminalization policies. But, it may struggle to find ample financial resources it needs to take full advantage of a more permissive environment in international markets, at least in the near-term.
In its fiscal Q3, it reported CAD$144.3 million in cash and equivalents, with trailing-12-month (TTM) operating losses of CAD$256.2 million. Management is working on realizing CAD$40 million in annualized cost efficiencies before the end of the 2024 fiscal year. Assuming those cost cuts are operational in nature, the business’ operating income will still be deep in the red. And it’s hard to see how Aurora could serve the demand from the blossoming German marijuana market without scaling up its cultivation facilities there or elsewhere, incurring more costs.
Nonetheless, it will probably survive the near-term, and it could eventually thrive. Management has a goal of making the company free cash flow (FCF) positive during calendar year 2024, and it is fully possible that the years it spent jettisoning cash-burning assets like unprofitable cultivation facilities will finally pay off. On that note, it’s undeniable that the right-sizing pursued by CEO Miguel Martin has changed its fortunes for the better since his appointment in late 2020.
Check out this chart of Aurora’s TTM operating margin over the last five years:
Furthermore, the company’s debt load has fallen significantly, and is now manageable. It has CAD$78.3 million in long-term debt and capital lease obligations, and only CAD$20.1 million in current debt. So it has room to borrow to fund expansion initiatives if needed, and it’s safe to say that the Aurora of today is capably led.
Consider the valuation
To summarize the above, Aurora Cannabis is still unprofitable, but hard work and scaling down means that its survival is not in question, and the opening of new markets could give it a pathway to some much-needed top line growth. While there does not appear to be a compelling reason to buy its stock over an alternative, it could be of interest for investors specializing in moderate-to-high risk turnaround plays. Now, let’s look at its valuation to see if there is an actual opportunity.
This stock’s price-to-book (P/B) multiple is 0.6. That means the market is valuing the business at lower than the historical value of its assets minus its liabilities. Such a valuation would make sense during the depths of its overextension in the Canadian market a few years ago, when demand was so clearly lax in comparison to its many cultivation facilities, and when its operating efficiency was still poor. Today, the stock looks somewhat undervalued. If not for its mediocre growth outlook, it would be dirt cheap at its current price.
Don’t touch this one yet
Risk-tolerant investors who prefer to buy shares of undervalued companies or turnarounds should consider Aurora Cannabis as a slowly-ripening opportunity. If management succeeds in leading the company to generate FCF consistently over 2024 and 2025, expect its valuation to become more expensive rapidly. That implies the time to buy the stock is now or within the next quarter or two.
On the other hand, this stock is not a good fit for most investors, and I certainly would not buy it myself. Growth will continue to be hard to come by in medicinal markets, especially as recreational access is easier than ever in most places. Shifting regulations in the E.U. are unlikely to change that without imperiling the hard-fought efficiency gains over the past few years, and there’s little reason to take on that risk when there are other businesses to invest in.
