Aurora Cannabis Inc. (TSX:ACB) saw its stock double in price in less than a month, as investors got into a frenzy after the cannabis company released its Q1 results. The headline that draws the attention of investors is that the company’s sales grew by 169%, and Aurora posted a solid profit of over $3 million — something even Canopy Growth Corp. (TSX:WEED) struggles to achieve.
However, before you get too excited with the results, there are three reasons why you should take a second look at the stock before deciding whether or not to jump on the bandwagon.
Financials are hard to compare given the impact of frequent gains and losses
A year ago, Aurora Cannabis had a gross profit that was just 2.8% of sales. This past quarter, the company’s gross profit of $8.8 million was more than revenue of $8.2 million, or 107% of sales. The obvious problem is that it becomes a bit of a challenge comparing one quarter to the next, just because there is so much impacting the company’s gross profit.
In this past quarter, Aurora Cannabis realized a gain on the fair value of its biological assets totaling $4.6 million, while a year ago it incurred a loss of $1.3 million. From an investor’s point of view, these gains and losses create a lot of instability in the company’s financials and can present a lot of risk from one period to the next, especially when in Q1 the gain had the impact of boosting sales by more than 55%.
The other concern from the company’s financials is that inventory expensed to cost of sales represented 24% of revenue for the quarter compared to just 16% a year ago. This is a significant increase in inventory costs in just one year.
Non-operating expenses outpacing revenue growth
Aurora saw expenses of $10.2 million triple the $3.4 million the company incurred in indirect costs a year ago. Sales and marketing expenses rose 134%, general and administration costs grew 186%, and share-based payments were up more than 550%. All of a sudden, the 169% increase in revenue just doesn’t look that impressive anymore.
In fact, the company posted a loss from operations of $1.4 million, and thanks to the unrealized gain we noted above, it was an improvement from the $3.3 million operating loss that it incurred a year ago.
Gains behind the company’s bottom-line growth
In addition to fair-value gains, Aurora recorded unrealized gains of $7.8 million, which propelled the company’s financials into the black. The problem again with gains having such a big impact on a company’s income statement is that it becomes more difficult for investors to compare one period against another without having to have a deep look into the financial statements.
Should you buy Aurora’s stock?
The rate at which we are seeing cannabis stocks grow should be alarming to any investor. There is too much hype in the industry backed by little substance and a lot of optimism. It’s hard to see a lot of upside for a stock that’s doubled in share price in less than a month on results that, frankly, don’t look that great once you take a closer look.