Why ACB’s Upcoming Earnings Aren’t Exciting Analysts

Aurora Cannabis (ACB) will be announcing its results for the first quarter of fiscal 2020 on November 14. This company was one of the best-performing cannabis stocks in 2018. However, it’s fallen 33.57% to 4.71 Canadian dollars on the TSE (Toronto Stock Exchange) YTD (year-to-date). It’s also down 28.02% to $3.57 on the NYSE YTD.

Do analysts think ACB’s first-quarter results can reverse this downtrend? Will their confidence in the stock dampen further?

Analysts’ revenue, margin, and EBITDA estimates for ACB

In the first quarter, analysts expect ACB’s revenue to rise 217.59% YoY (year-over-year) to 94.24 million Canadian dollars. However, this will be a sequential decline of 4.75%. Previously, they expected its revenue to rise 230% YoY to 98 million Canadian dollars. Analysts have also reduced their fiscal 2020 revenue estimate for ACB to 519.32 million Canadian dollars, YoY growth of 109.46%. Previously, they’d expected fiscal 2020 revenue to rise 155.37% YoY to 534.4 million Canadian dollars.

In the first quarter, analysts expect ACB’s gross margin to contract 14.63 percentage points YoY to 53.21%, a sequential decline of 2.47 percentage points. Previously, they expected its gross margin to contract 14.77 percentage points YoY to 53.07%. Analysts also expect ACB’s gross margin to expand 6.60 percentage points to 61.22% in fiscal 2020.

Meanwhile, analysts expect Aurora Cannabis’s adjusted EBITDA to improve by 71.24% YoY to -19.53 million Canadian dollars. Their previous estimate of -19.1 million Canadian dollars implied 71.86% YoY growth. Analysts also expect ACB’s fiscal 2020 adjusted EBITDA to rise 74.49% YoY to -39.79 million Canadian dollars.

ACB posted disappointing fourth-quarter results

Aurora Cannabis reported revenue of 98.9 million Canadian dollars in the fourth quarter of fiscal 2019. Although its revenue marked a YoY rise of 416.75%, it came up short of the consensus estimate of 108.2 million Canadian dollars. ACB failed to achieve even its own sales guidance of 100 million–107 million Canadian dollars. The company reported EBITDA of -11.74 million Canadian dollars, a YoY rise of 70.20%. Here again, it failed to achieve its guidance of becoming EBITDA positive in the fourth quarter.

Stifel analyst disappointed

On September 16, as reported by The Fly, Stifel analyst W. Andrew Carter expressed disappointment in ACB’s fourth-quarter results. He downgraded the stock from “hold” to “sell.” He also reduced its target price from 7 Canadian dollars to 5 Canadian dollars. The analyst pointed out the company’s weak performance in Canada. He also questioned its preparedness to take on global opportunities.

On September 16, according to Investor’s Business Daily, Carter reduced ACB’s fiscal 2020 revenue estimate from 600 million Canadian dollars to 485 million Canadian dollars. He also lowered its fiscal 2020 EBITDA estimate from -32 million Canadian dollars to -89 million Canadian dollars. He doesn’t expect ACB to become EBITDA positive before the first quarter of fiscal 2021. Analysts expect ACB to become EBITDA positive by the third quarter of fiscal 2020.

On September 16, as reported by Investor’s Business Daily, Carter also raised concerns about ACB’s balance sheet strength. He expects ACB to require 445 million Canadian dollars for investments by March 2020. He expects the company to become cash negative. This, in turn, may require ACB to raise money from capital markets. The analyst is doubtful about ACB’s capacity to raise finances in a difficult environment. He’s also highlighted its 200 million Canadian dollars’ worth of convertible debentures. These are set to mature in March 2020. This debt could prove to be a cash drag. The company’s current share price is much lower than the conversion price of the debentures. Hence, the debentures will be treated as debt and not equity.

MKM Partners also worried about ACB’s revenue and earnings growth

On October 2, as reported by MarketWatch, MKM Partners analyst Bill Kirk first highlighted the possibility of ACB’s weak performance in the first quarter. On its fourth-quarter earnings call, Aurora highlighted lower cannabis sales in the provinces in July and August. It also highlighted a slower-than-anticipated retail rollout in Ontario. Kirk cited these two factors as resulting in the company’s lower sequential revenue growth. The analyst also expressed concerns about the company’s profitability. He expects stagnant revenue and increasing costs. He also expects Aurora to become EBITDA positive by the first quarter of 2021.

On October 14, as reported by MarketWatch, Kirk also highlighted pricing pressures in the cannabis industry. These pressures and the gap between legal and black market cannabis products are a few of ACB’s major problems. He claimed that HEXO’s dismal pre-earnings announcement suggested a depressed retail rollout in Ontario and Quebec. He reduced the company’s first-quarter revenue estimate from 117 million Canadian dollars to 98 million Canadian dollars, lower than the then-consensus revenue estimate of 105 million Canadian dollars. On November 11, Kirk again reduced ACB’s first-quarter revenue estimate to 92.2 million Canadian dollars.

Cowen is also concerned about ACB

On November 12, as reported by MarketWatch, Cowen analyst Vivien Azer highlighted the possibility of a weak financial performance from ACB in the first quarter. Azer expects ACB’s recreational marijuana revenue to rise sequentially by 7%. She attributes this modest revenue growth expectation to excess supply in the market. She also expects flat sequential growth in the company’s medical cannabis revenue in the first quarter.

Azer also doesn’t expect ACB’s wholesale business to be a meaningful revenue contributor in the first quarter. The subsequent reduction in its operating leverage will likely lead to a sequential expansion of its losses.

BofA Merrill Lynch on consensus estimates for cannabis stocks

On October 7, as reported by The Fly, BofA Merrill Lynch analyst Christopher Carey claimed that the consensus estimates for cannabis stocks are “at least 30% too high.” On July 18, as reported by Investor’s Business Daily, BofA Merrill Lynch raised concerns about ACB’s cash spending requirements.