Aurora Cannabis’s Q1 Reflects Industry Doom and Gloom

Aurora Cannabis (ACB) reported its third-quarter earnings results after the market closed on November 14. In the quarter, it outperformed analysts’ gross margin and net profit estimates. Sequentially, its average selling price increased 6.8% to 5.68 Canadian dollars per gram, and its production cost fell 25% to 0.85 Canadian dollars per gram. Despite these positives, Aurora stock fell 18.0% on November 15. Let’s see what’s driving the stock down.

In the first quarter, Aurora reported revenue of 75.25 million Canadian dollars. It fell short of analysts’ estimate of 93.31 million Canadian dollars and represented a sequential fall of 24%. The decline in consumer cannabis sales and wholesale sales lowered the company’s revenue. However, a rise of 3% in its medical cannabis sales offset some of the decline. During the quarter, the company’s consumer cannabis sales fell 33.1% to 30.02 Canadian dollars. Its management blamed provincial distributors’ decisions to lower their inventory levels for the revenue decline.

Further, the company announced a delay in its construction of its Aurora Nordic 2 facility in Denmark and its Aurora Sun facility in Alberta due to a decrease in demand for cannabis. Lower-than-expected sales and management’s decision to scale down its expansion plans appear to have caused the stock to fall.

On November 15, Aurora Cannabis also announced that debenture holders could convert their debentures to shares at an amended early conversion price. The conversion price will be a 6% discount to the five-day volume-weighted moving average. Debenture holders can convert their debentures from November 18 until 5:00 PM ET on November 20.

However, Jefferies analyst Owen Bennett is skeptical about the company’s initiative. As reported by MarketWatch, he believes that the debenture conversion initiative could further dent investors’ sentiments. He added, “With possible cash pressures evident, announcing ceased construction at facilities despite a press release just 6 weeks ago praising progression, and now EBITDA (and cash) positive looking unlikely this year, it would be fair for investors not to believe them.”

Since Aurora reported its first-quarter earnings results, several analysts have lowered their price targets. As of November 15, analysts have a consensus price target of 7.32 Canadian dollars on the stock, down 19.2% from 9.06 Canadian dollars on October 15. The new price target represents a 12-month return potential of 67.0%.

Before Aurora reported its first-quarter results, analysts expected the company to report revenue of 851.0 million Canadian dollars in the next four quarters. However, after Aurora reported its first-quarter numbers, analysts lowered their revenue estimate by 6.7% to 793.75 million Canadian dollars. Management’s decision to delay its capex appears to have prompted analysts to lower their revenue estimates. For the same period, analysts have reduced their adjusted EBITDA estimate from 152.31 million Canadian dollars to 108.90 million Canadian dollars.

Since its fall on November 15, Aurora Cannabis has lost 47.1% of its value this year. As of November 15, the company was trading at a discount of 73.7% to its 52-week high of 13.67 Canadian dollars. It’s also trading just 0.6% above its 52-week low of 3.57 Canadian dollars. Aurora isn’t the only cannabis stock that’s tumbling. The entire sector is going through a rough patch. The ETFMG Alternative Harvest ETF (MJ) has fallen 32.6% YTD, while the S&P 500 has risen 24.5%. Meanwhile, peers Aphria (APHA), Cronos Group (CRON), and Canopy Growth (WEED) (CGC) have fallen 28.0%, 41.9%, and 44.6%, respectively, during the same period.

For more on the industry, you may want to read our recently published Top 5 Reasons Why Cannabis Earnings Disappointed and Canopy Growth’s Post-Earnings Targets and Ratings. Also check out 420 Investor Daily for more cannabis-related updates and news.