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Aurora Cannabis: Can It Boost the Industry in Q1?

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Canada-based medical and recreational cannabis company, Aurora Cannabis (ACB) will report its Q1 fiscal 2020 results on November 14. On November 8, the company’s shares closed at $3.81 on NYSE. This is 23.19% lower on YTD (year-to-date) basis. Also, it’s lower by 63.08% as compared to a 52-week high price of $10.32. Aurora Cannabis shares are only 12.06% higher than its 52-week low price of $3.40.

On November 8, the stock closed at $5.03 Canadian dollars. This is 29.06% lower on a YTD basis. Also, it’s 63.20% lower than the 52-week high price of $13.67 Canadian dollars. Aurora Cannabis shares are only 19.59% higher than its 52-week low price of $4.59 Canadian dollars.

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Ups and downs of the cannabis sector

The cannabis sector has seen difficult times this year. Global uncertainty due to the ongoing trade war affected the overall investor sentiment. Also, the world is worried about the repercussions of a no-deal Brexit. Additionally, the cannabis sector had its share of industry-specific problems. This includes the ongoing vaping crisis and black market sales. And the industry is battling supply-demand imbalances and subsequent pricing pressures.

CDC’s latest announcement about the possible role of Vitamin E acetate comes as a whiff of fresh air for the cannabis industry as a cutting agent in illicit cannabis products. Further, anticipated legal cannabis in the US and Mexico could be growth drivers for the sector. Canada’s Cannabis 2.0 has already emerged as a major positive for cannabis stocks.

In “The Global Cannabis Report” released in November 2019, Prohibition Partners estimated the size of the legal cannabis market as $103.9 billion by 2024. This beats GrandView Research’s legal cannabis market size estimate of $66.3 billion by 2025. Also, it’s more than the Green Entrepreneur’s estimate of $40 billion by 2024.

In this backdrop, will Aurora’s first-quarter results push up the stock? Or will it cause the company to crash downwards?

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Analysts’ estimates for Aurora Cannabis’ revenues

Analysts expect Aurora Cannabis to report revenue of $94.97 million Canadian dollars in Q1. This implies a YoY (year-over-year) rise of 220.04%. Previously, analysts projected the company’s Q1 revenues to be $96.06 million Canadian dollars. This would have implied a YoY rise of 223.72%. Also, analysts now expect the company to report revenue of $519.32 million Canadian dollars in fiscal 2020. This implies a YoY rise of 109.46%. This is a drop from the previous estimate of $522.11 million Canadian dollars. This would have implied a YoY rise of 110.58%.

On November 11, as reported by MarketWatch, MKM Partners’ analyst Bill Kirk lowered Aurora Cannabis’ Q1 revenue estimates. Analysts revised downwards Aurora Cannabis’ net sales estimates by 25% since the end of August 2019. However, Bill Kirk believes that there is still a downside risk in the revenue estimates. He expects the company’s revenues to be $92.2 million Canadian dollars. This is lower than the previous forecast of $98.0 million Canadian dollars.

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As reported by MarketWatch, Kirk highlighted three major factors that have led to the downward revision in estimates. Kirk is concerned about the inventory held by the provinces. This, in turn, is reducing the number of shipments from manufacturers. Also, the analyst expects industry-wide pricing pressures to weigh down on the company’s sales. Finally, although pricing of regulated cannabis products has come down, it is still higher than illicit products. Hence, there is not a big shift in market share from illegal to legal players. In this backdrop, Bill Kirk has rated Aurora Cannabis as “Sell.”

Analysts’ estimates for Aurora Cannabis

Analysts expect Aurora Cannabis’ Q1 gross margin to be 53.07%. This is a YoY decline of 14.77%. Also, they expect the company’s fiscal 2020 gross margins to be 61.22%. This will be a YoY rise of $6.6%.

Analysts forecasted Aurora Cannabis’ Q1 EBITDA to be -$18.83 million Canadian dollars. This is a YoY rise of 72.26%. They also expect the company’s fiscal 2020 EBITDA to be -$35.87 million Canadian dollars. This will be a YoY rise of 77.00%.

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On November 11, as reported by MarketWatch, Bill Kirk highlighted problems caused by rising costs and stalled top-line growth for cannabis stocks. He claimed that Aurora Cannabis will most likely not be EBITDA-positive by June 2020. Aurora Cannabis’ consensus EBITDA for the quarter ending in June 2020 is $10.26 million Canadian dollars.

Is there any upside for Aurora Cannabis?

On November 6, as reported by MarketWatch, Cantor Fitzgerald analyst Pablo Zuanic called out valuations in the cannabis sector as attractive for long-term investors. The analyst claims that positive catalysts will surpass the negative ones for the cannabis sector in 2020. The analyst highlighted recreational spending in Colorado, which is 12x times that in Canada. Also, he highlighted per capita medical marijuana spending in Colorado. This is 19x times that in Germany.

Pablo Zuanic is highlighting growth opportunities in the legal cannabis sector based on these spending levels. However, the analyst rated Aurora Cannabis as “Neutral.” He has also set the target price as $5.10 Canadian dollars.

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