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HEXO and Aurora Cannabis Stock, Investors Should Think Twice

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Investors’ interest in Aurora Cannabis (NYSE:ACB) and HEXO (TSE:HEXO) shares has been increasing. Both of the companies reported strong financials in the most recent quarter. Improving sales, declining costs, and expectations of positive EBITDA have been catching investors’ attention.

However, there are structural problems. I’m still cautious about HEXO and Aurora Cannabis stock.

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Cannabis companies’ recent performance

HEXO and Aurora Cannabis posted an impressive set of numbers in the third quarter. During the third quarter, HEXO’s net revenues surged about 70% YoY (year-over-year) to 22.1 million Canadian dollars. Meanwhile, the net revenues increased by about 30% on a sequential basis. Strong growth in HEXO’s value brand and new product launches drove its top line.

HEXO also managed to reduce its losses. During the quarter, the company’s gross margin improved significantly, while its adjusted EBITDA loss narrowed both on a YoY and sequential basis.

HEXO’s value brand, Original Stash, continues to perform well. The company called the brand a “black market killer.” The company’s focus on expanding its portfolio with value and premium products bodes well for growth. Also, reduced costs should support margins and help the company achieve positive EBITDA.

Similar to HEXO, Aurora Cannabis also posted strong revenues and managed to lower its losses. Aurora Cannabis reported net revenues of 78.4 million Canadian dollars, which increased by about 18% compared to the previous quarter. Meanwhile, the company posted an adjusted EBITDA loss of 50.9 million Canadian dollars compared to 80.3 million Canadian dollars in the second quarter. The improvement in Aurora Cannabis’s EBITDA came after its higher revenues and lower cash cost.

Aurora Cannabis also expects to report a positive EBITDA in the first quarter of fiscal 2021.

Bottom line

While both of these companies’ recent quarterly performances are impressive, my outlook on HEXO and Aurora Cannabis stock remains unchanged. The cannabis industry faces several structural challenges. A lack of access to financing is the main challenge. Also, the growing illicit marijuana market and more price competition pose challenges and will likely remain a drag.

While I’m not attracted to the whole cannabis sector, I think that Aphria (NYSE:APHA) is a better investment option than HEXO and Aurora Cannabis. Aphria has witnessed higher sales. Also, the company reported a positive EBITDA in the last four quarters.

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