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Why Analysts Still Aren’t Convinced about Aurora Cannabis

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On May 14, Aurora Cannabis (NYSE:ACB) reported an impressive third-quarter performance, which ended on March 31. For the quarter, the company reported revenues of 78.4 million Canadian dollars and an EBITDA loss of 50.8 Canadian dollars. Sequentially, the company’s revenue increased by 18%, while its EBITDA loss fell by 29.4 million Canadian dollars to 50.85 million Canadian dollars. Also, Aurora Cannabis spent 43% less cash compared to the second quarter. The company has brought its expenses down. Aurora Cannabis is on track to achieve positive EBITDA by the first quarter of fiscal 2021. The impressive third-quarter performance led to a rise in the company’s stock price. As of May 19, Aurora Cannabis was trading at 20.40 Canadian dollars, which represents a rise of 121.7% since it reported its third-quarter earnings.

Analysts’ target price for Aurora Cannabis

Analysts had mixed opinions after Aurora Cannabis reported its third-quarter earnings. MKM Partners and Altacorp Capital raised their target prices, while CIBC, Canaccord Genuity, Cowen, and Piper Sandler lowered their target price. MKM Partners increased its target price from 12 Canadian dollars to 18 Canadian dollars, while Altacorp Capital raised its target price from 2.50 Canadian dollars to 10.40 Canadian dollars. CIBC slashed its target price from 27 Canadian dollars to 14 Canadian dollars, while Canaccord Genuity lowered its target price from 27 Canadian dollars to 24 Canadian dollars. Also, Cowen reduced its target price from 12 Canadian dollars to 11 Canadian dollars. Piper Sandler cut its target price from $12 to $10. As of May 19, analysts’ consensus target price was 13.12 Canadian dollars, which represents a fall of 35.7% from its current stock price.

From the above graph, you can see that analysts have been lowering their target prices since May 2019. The company’s stock price fell due to weakness in the cannabis sector, a weak performance in the first two quarters of this fiscal year, and rising debt.

Analysts’ ratings for Aurora Cannabis

Since Aurora Cannabis reported its third-quarter earnings, Piper Sandler upgraded the stock from “underweight” to “neutral.” Overall, analysts favor a “hold” rating for the stock. Among the 16 analysts, 68.8% recommend a “hold,” 12.5% recommend a “buy,” and 18.8% recommend a “sell.”

Analysts’ opinions

David Kideckel of AltaCorp Capital maintained his “sector perform” rating, but hiked his target price to 10.40 Canadian dollars from 2.50 Canadian dollars. As reported by Cantech Letter, Kideckel said that introducing the value brand and Cannabis 2.0 products helped Aurora Cannabis regain market share. The company sold 34% more cannabis this quarter compared to the previous quarter. He said that COVID-19 didn’t have a material impact on Aurora Cannabis’s operations. However, he expects the outbreak to have a negative impact on the company’s near-term growth prospects.

Jason Zandberg of PI Financial slashed his target price after Aurora Cannabis’s third-quarter earnings. He said that the company’s third-quarter sales were a pleasant surprise, as reported by Cantech Letter. However, he’s still concerned about the company’s expenses. He wants Aurora Cannabis to reduce its expenses. In the client note, he said, “ACB production was 36,207kg during the quarter but only sold 12,729kg. The supply demand imbalance has been in place for several quarters. We expected that the company will continue to flood the market with low price flower. The biggest question with ACB is its cost structure which has made significant reductions already but still requires deep cuts.”

Bill Kirk of MKM Partners is also skeptical about the company’s turn around, as reported by MarketWatch. In his client note, Kirk said that he’s skeptical about the company’s goal of achieving positive EBITDA in the first quarter of fiscal 2021. He highlighted the uncertain revenue outlook. He also added that the company has been growing cannabis faster than it can sell. The demand isn’t expected to rise significantly. As a result, Kirk thinks that the company will have to write its inventory down.

YTD stock performance and my take

Despite the recent surge, Aurora Cannabis has lost 39.1% of its stock value this year as of May 19. The lower-than-expected second-quarter performance, rising debt, and weakness in the cannabis sector dragged the stock down. Also, the company has underperformed its peers and cannabis ETFs. During the same period, Canopy Growth (TSE:WEED), OrganiGram Holdings (NASDAQ:OGI), and Aphria (NYSE:APHA) have fallen by 12.0%, 32.3%, and 27.6%, respectively. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has also fallen by 20.2% YTD.

Before Aurora’s third-quarter earnings, I was bearish on the company. I’m still skeptical about Aurora Cannabis’s revival. The company’s sales growth has largely come from its value brand, which could impact its margin and also its goal of reporting positive EBITDA in the first quarter of fiscal 2021. So, I think investors should utilize the surge in the stock price to exit the stock.

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