All it took was two days for Aurora Cannabis (TSX:ACB)(NYSE:ACB) stock to double. Shares of the cannabis kingpin were up a whopping 67% on Friday following the release of some stellar fiscal third-quarter results that injected a new wave of optimism into cannabis stocks, the likes of which we haven’t seen in well over a year.
While Aurora Cannabis stock may have doubled in two days, shares of the licensed cannabis producer are still down over 90% from all-time highs. The long-term chart suggests that the cannabis trade is dead.
Still, for young investors with a high tolerance for risk, it makes sense to nibble away into a position following a hopeful quarter that exhibited incredible revenue growth and decelerating cash burn.
Aurora Cannabis impresses in fiscal Q3 2020
Aurora Cannabis clocked in an EPS loss of $1.37, which was wider larger than the consensus estimate EPS loss of $0.76. Despite the earnings’ miss however, Aurora impressed with top-line momentum, continued progress with its restructuring plan, lower overhead expenses, and lower-than-expected cash burn.
Cannabis companies are notorious for burning through ridiculous sums of cash. Aurora’s lower cash burn rate was therefore arguably the primary reason why investors are flocking back into a stock that many thought would be left for dead. Aurora Cannabis’s cash burn dropped by over 40% to $154 million.
While a single quarter of lower cash burn may not be the start of a trend, the company’s target of reaching positive adjusted EBITDA by Q1 F2021 is no longer as unrealistic as most people believe.
Aurora Cannabis looks like it’s on the right path toward profitability. Once it makes a sustainable move into the green, shares of the oversold cannabis producer could easily find themselves back above the $33 ceiling of resistance.
Aurora Cannabis versus the black market
Piper Sandler recently upgraded Aurora Cannabis stock to neutral, touting Aurora’s “value brand,” which continues to gain significant traction. Piper also praised the company for its low-cost production advantage, noting that Aurora, “Can likely drive further share gains from industry down trading and the illicit market.”
In a prior piece, I noted that the likelihood that Aurora Cannabis would come out as one of the few long-term winners in a potential price war with the black market.
“Although margins would initially flop in such a scenario, the massive amount of sales lost to the black market (40% of cannabis consumers get their weed from the black market) will go right into the top-line of the LPs, resulting in massive top-line growth numbers,” I said.
“Lower margins, higher sales. That’s not necessarily a bad thing in the grander scheme of things when you consider margins are steadily improving for innovative cultivators like Aurora. For poorly-capitalized firms with lousy margins and low bud yields, though, lower margins could be seen as a nail in the coffin.”
Profitability is no longer just a pipe dream for Aurora Cannabis.
With potentially higher-than-expected sales growth on the horizon, as Aurora looks to bring the fight to the illicit market with its lower-cost offerings, young investors may find it a good idea to nibble away on the stock today now that there’s more visibility with Aurora and its path toward sustained profitability.
Shares currently trade at a mere 0.44 times book, so Aurora stock could easily double again and still be ridiculously cheap.
The post-earnings pop could mark the start of a sustained rally to much higher levels as the shorts continue to feel the squeeze.
Stay hungry. Stay Foolish.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any of the stocks mentioned.