The Motley Fool

Aurora Cannabis (TSX:ACB) Just Doubled in 2 Days: Is This Just the Start?

Image source: Getty Images

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.”

Foolish takeaway

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.

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.