Last month, Aurora Cannabis (NYSE:ACB) surprised investors with an impressive third-quarter performance. The company beat analysts’ revenue expectations, while its EBITDA losses were lower than expected. Aurora Cannabis reduced its cash burn by over 43% sequentially. Also, the company entered US CBD operations by acquiring Reliva, which is a US-based CBD company. All of these factors led to a rise in the stock price. As of June 5, Aurora Cannabis was trading at 18.79 Canadian dollars—a rise of 104.2% since it reported its third-quarter earnings. If investors caught this rally, they would be sitting on good profits. So, is there more upside to this rally or should you book profits? Aurora Cannabis has made all of the right moves. So, I think you should hold on to the stock.
Aurora Cannabis’s growth prospects
Amid the COVID-19 outbreak, many businesses temporarily closed their operations, which led to a record unemployment rate in Canada. The job losses would lower consumers’ disposable income. So, the decline in disposable income led customers to move towards cheaper products. Read How’s COVID-19 Impacting Cigarette and Cannabis Sales? to learn more. Meanwhile, Aurora Cannabis launched its value brand, Daily Special, in February to compete with the black market. So, I think that customers’ shift towards value products could drive the company’s sales.
Also, Aurora Cannabis plans to improve its efficiency by lowering its operating costs. Improved research and development led to the development of high-THC plants, which are consistently delivering above 20% THC. These initiatives led the company’s cash cost to decline to 0.85 Canadian dollars per gram. Despite customers moving towards value products, I think that Aurora Cannabis could maintain its margins by lowering its production expenses.
Aurora Cannabis entered US CBD markets
Last month, Aurora Cannabis completed the acquisition of Reliva. Through this acquisition, the company will enter the US CBD market, which could reach $25 billion by 2025. According to IRI data, Reliva is ranked first in tropicals and second in overall market share. Also, the company’s products are sold at over 20,000 retail locations and also through e-commerce. Reliva reported a positive EBITDA in the last year, which ended in March 2020. Also, the company doesn’t require additional capital expenditure or working capital. So, I think that the transaction could help Aurora Cannabis achieve its goal of reporting a positive EBITDA by the first quarter of 2021.
At the end of the third quarter, Aurora Cannabis had 230.2 million Canadian dollars in cash. Earlier this month, the company announced that it will sell its stake in Alcanna for 27.6 million Canadian dollars. The transaction could strengthen the company’s balance sheet.
YTD stock performance and conclusion
Despite the recent surge, Aurora Cannabis has been trading 43.9% lower YTD. Concerns about the dilution, rising debt, and weak second-quarter performance led to a fall in the company’s stock price. Meanwhile, the company has underperformed its peers and cannabis ETFs. Canopy Growth (TSE:WEED), HEXO (TSE:HEXO), and Aphria (NYSE:APHA) have fallen by 18.7%, 25.4%, and 13.4% YTD, respectively. The Horizons Marijuana Life Sciences Index ETF (TSE:HMMJ) has fallen by 13.6% during the same period.
Although Aurora Cannabis continues to face rising debt and dilution, I think that the company has been making the right moves this time. The company has been focusing on lowering its expenses and strengthening its balance sheet. So, I think that Aurora Cannabis’s recent rally will likely continue. Investors should hold onto the stock for now.