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Aurora Cannabis: Will Pricing Pressure Affect Its Q1?

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Shares of Aurora Cannabis (ACB) rose 6.42% in the November 8 trading session. This change lagged the Horizons Marijuana Life Sciences ETF’s (HMLSF) gain of 6.11%. Meanwhile, the ETFMG Alternative Harvest ETF (MJ) rose 4.36%, and the Horizons U.S. Marijuana Index ETF surged 3.39%.

These gains were driven by industry leader Canopy Growth’s rise of 12.47% after its announcement of a partnership with Drake. Wall Street celebrated the deal, and the whole sector closed in the green on November 8.

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However, for Aurora, the news seems to have added more fuel to the fire. Pricing pressure could remain a concern before Aurora’s earnings announcement, which is expected on November 14 after the market closes. Currently, analysts expect Aurora’s revenue and EPS to come in at $70.31 million and -$0.04, respectively. These figures represent 213.78% and 28.33% year-over-year growth, respectively.

Pricing pressure could be a concern for Aurora Cannabis

I’ve recently been extremely bullish on Aurora Cannabis, predicting stock appreciation in the near term. For more info, read Aurora Cannabis Stock Is Gearing Up for a Breakout and Aurora Cannabis Stock: What Options Traders Expect.

However, it seems the market sentiment is currently shifting. HEXO recently reported its fiscal 2019 fourth-quarter results, recognizing 15 million Canadian dollars’ worth of revenue and losses of 61 million Canadian dollars. More interestingly, the company provided a pricing breakdown for its medical and recreational sales. HEXO has experienced a substantial reduction in pricing compared to the previous quarter. These changes include an 8% reduction in the medical average price, a 10% reduction in the recreational average price, and a surprisingly low wholesale average price of $0.56 per gram. What’s more, the company experienced an inventory deterioration of 16.9 million Canadian dollars in the given quarter due to pricing pressure in the market.

Based on that performance, I’d suggest that the legal Canadian cannabis market is already facing oversupply. This situation could affect Aurora’s revenue and, as a result, trigger a guidance miss. Such a miss would create additional negative pressure on the stock.

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Moreover, Aurora Cannabis has already spent $150 million for world-class cultivation facility Aurora Sky. It’s also currently spending a lot of cash on other facilities, such as Aurora Sun and Aurora Nordic 2. Given the company’s negative cash flow and its current cash reserves of $241.3 million, Aurora Cannabis stock could be a loser in the long term, struggling with pricing deceleration.

Options traders remain bullish despite challenges

Options traders appear to have made some bullish bets that Aurora Cannabis stock will continue to rise through January. The $3.00 calls for expiration on January 17 have seen their open interest levels rise by over 7,000 contracts during the last trading session, bringing the total open interest to about 30,000. The calls traded for approximately $0.95 per contract on November 8, significantly higher than the average spread price and ask price.

This means that a buyer of the calls would have been extremely bullish on the stock and opened a position instantly, paying a premium even to the ask price. For that buyer to earn a profit, the stock would need to rise to around $3.95 by the expiration date. This situation would suggest a gain of about 3.6% from ACB’s closing price of $3.81 on November 8.

The open interest levels for the November 29 $3.50 calls also saw higher open interest levels on November 8. The number of open contracts rose by 2,171 contracts to about 14,772, according to Barchart.com. This transaction looks like a bullish, optimistic bet, as it has a total dollar value of about $0.72 million. It seems like a large wager given that Aurora Cannabis stock would need to rise to $4.00 in the coming few weeks. That’s a gain of about 5% from its current price.

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