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Another Week in Red for Cannabis Investors as Earnings Disappoint

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Cannabis investors continued to experience a massive decline in share prices for the last week ended on November 15, 2019. Leading cannabis stocks such as Aurora Cannabis (TSX:ACB)(NYSE:ACB), Canopy Growth, and Hexo lost market value in the last week.

While Canopy Growth stock fell 26.7%, Aurora Cannabis and Hexo lost 27.6% and 22.5%, respectively, in the last week. Horizons Marijuana Life Sciences ETF also slumped by a massive 17% last week.

Canopy Growth and Aurora Cannabis both reported underwhelming quarterly results last week. Cannabis companies have been impacted by lower-than-expected demand, driven by the slow rollout of retail stores in key provinces. These firms are also impacted by cannibalization from the illegal market, regulatory issues, and more.

This has resulted in high inventory levels for Aurora and peers. While we analyzed Canopy Growth’s earnings recently, let’s take a look at Aurora’s metrics and what lies in store for investors.

Aurora reported net revenue of $70.8 million in Q1

On November 15, Aurora Cannabis announced its fiscal first quarter of 2020 (year ending in June) results. It reported net cannabis revenue of $70.8 million. This was substantially below consensus revenue estimates of $93.36 million. Shares of Aurora Cannabis fell 18% on Friday after results left investors and analysts unimpressed.

Aurora’s gross profit before fair-value adjustments in the September quarter stood at $42.5 million or 56.5% of total revenue. It improved from 53% in the prior-year period. The gross margin increased, as Aurora was successful in lowering the cost to produce one gram by 25% sequentially to $0.85/gram.

While total cannabis sales fell sequentially, Aurora Cannabis managed to increase medical cannabis sales by 3% to $30.5 million. The company expanded its medical patient base by 8% to 91,116, which drove medical cannabis sales higher.

Consumer cannabis sales fell by 33% to $30 million due to the factors mentioned earlier that have impacted most cannabis companies. Wholesale cannabis sales fell 49% sequentially to $10.3 million. Despite lower-than-expected sales, Aurora Cannabis managed to increase production volume by 43% sequentially to 41,436 kg.

Company CEO Terry Booth stated, “Despite short term distribution and regulatory headwinds in Canada that have temporarily impacted the industry, the long-term opportunity for Aurora in the global cannabis and cannabinoids market is immense … Aurora has, and will continue to focus on everything in our control. Our success in doing this was demonstrated again this quarter by continued strong improvement in our core KPIs. We delivered solid operating results this quarter, exemplified by our industry-leading cash cost to produce which declined another 25% to $0.85 per gram this quarter, as well as by our industry-leading gross margins and market share.”

What next for Aurora Cannabis and investors?

While demand from the Canadian recreational market has been tepid, Aurora can look to expand into international markets and the medical marijuana space. In the September quarter, ACB’s international medical net revenue rose 11% sequentially to $5 million and accounted for 7% of total cannabis sales.

Though total medical marijuana sales account for less than 50% of revenue, Aurora has a vast base of consumers, which is rapidly expanding. Cannabis 2.0 will also help to shore up demand, as products are expected to hit retail markets by mid-December.

Aurora Cannabis ended the September quarter with inventory worth $151 million, up from $113.6 million in the June quarter. The demand is expected to be subdued, unless retail store locations start growing at a robust pace.

The growth story for cannabis companies remains intact, and the addressable market is huge. However, there are some short-term concerns that might drive the stocks lower as we head into FY 2020. Aurora Cannabis stock has already lost 73% in market value since March 2019.

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The Motley Fool recommends HEXO. and HEXO. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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