Last week, Aurora Cannabis Inc (TSX:ACB)(NYSE:ACB) announced that it had secured an agreement to sell cannabis in Mexico through a deal with Farmacias Magistrales S.A., a pharmaceutical company with 500 hospitals and pharmacies across the country. With the only license in Mexico to import cannabis, Farmacias will be able to import and sell Aurora’s products, even those containing THC.
While Mexico has made progress towards legalization, recreational marijuana use is not entirely legal just yet. Nonetheless, it is definitely headed toward that direction. This is a big opportunity for Aurora to gain a foothold into yet another country as it continues to expand into more regions around the world.
Aurora CEO Terry Booth stated in the release, “This new exclusive partnership further expands Aurora’s early mover advantage in Latin America, allowing us to become a leading player in the development of the medical cannabis system in Mexico, a legal market of 130 million people.”
Takeaways for investors
From an investment standpoint, this is an easy win for Aurora, as through and importing agreement the company doesn’t expose itself to much risk and can just ship its products to Farmacias, who can then distribute it as necessary. Aurora’s risk is limited to Farmacias paying its bills, as it basically becomes a customer and distributor with significant reach across Mexico.
The market size of 130 million people certainly makes it an appealing opportunity, particularly with Aurora having exclusive access to it under this agreement.
The one concern I would have is whether Aurora’s price point for this market would be competitive enough for it to turn a profit. What consumers can afford to pay for legal cannabis in Mexico is far different than what they can pay for it in Canada, and so any profit for Aurora might be a slim one.
In addition, the black market for cannabis in Mexico is very significant and will further put pressure on prices, as a high price is unlikely to attract many consumers.
For those reasons, I don’t expect Aurora will obtain a high price per gram, which might not help its bottom line too much given the company has to incorporate shipping costs and the overhead associated with coordinating and managing deliveries as well.
The move for Aurora is clearly to add market share and continue to boost its top line. It’s a good move, but with investors being increasingly concerned about profitability, it might not do much to help there.
In its most recent quarterly report, Aurora saw a 260% growth in its revenues, although that has done little for the stock price, as it hasn’t shown much progress since then and year to date it is down around 20%.
As a result, I wouldn’t say that Aurora is a buy on these results, especially with the Canadian market already struggling with a lack of supply, the company isn’t in need of finding more place to sell its products to just yet.
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Fool contributor David Jagielski has no position in any of the stocks mentioned.