Compared to their counterparts south of the border, Canadian cannabis companies are fundamentally weak. While U.S. marijuana producers such as Green Thumb Industries (CNSX:GTII) have breached the US$1 billion revenue figure in the last four quarters, Aurora Cannabis (TSX:ACB) is wrestling with falling sales. Moreover, Green Thumb has reported adjusted profits in the last two years, while Aurora Cannabis reported an operating loss of over $450 million in this period.
Down 99% from all-time highs, ACB stock is currently priced at a market cap of $385 million. Let’s see if this Canadian marijuana giant should be part of your equity portfolio right now.
Is Aurora Cannabis stock a good buy?
After several quarters of losses, Aurora Cannabis reported an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $1.4 million in the fiscal second quarter (Q2) of 2023 (ended in December). In the year-ago period, its EBITDA loss stood at $7.1 million. However, the company’s net loss widened to $67.2 million from $51.9 million in Q1 of 2023. Its net revenue also rose 2% year over year and 20% sequentially to $62 million.
Aurora Cannabis expects to gain traction in Germany, which is on track to legalize the recreational use of marijuana in the next two years. In fact, Aurora Cannabis has claimed it is the second-largest producer of marijuana flowers in Germany and is one of three licensed cannabis producers of medical cannabis in the country.
During its recent earnings call, Aurora Cannabis argued it has the best balance sheet among Canadian peers. But it ended Q2 with just $310 million in cash, which is not enough given the company’s high cash burn rates. Aurora Cannabis has repeatedly diluted shareholder wealth in the last nine years by raising equity capital several times, resulting in a steep decline in stock prices.
What’s next for ACB stock and investors?
If Aurora Cannabis can successfully penetrate the cannabis market in Germany, it should be able to drive revenue higher in the upcoming decade. Germany’s population is twice as large as Canada’s, but establishing a presence in Europe would mean the company will need to invest heavily in capital expenditures and acquisitions. So, investors can easily brace for another round of dilution, given Aurora’s less-than-impressive liquidity position.
In the last few quarters, Aurora Cannabis has focused heavily on the medical marijuana segment, which is a high-margin vertical. In Q2, its adjusted gross margin (before fair-value adjustments) stood at 61% for medical marijuana products. Comparatively, for its recreational marijuana business, gross margins were much lower at 20%.
Analysts expect Aurora Cannabis sales to fall by 11% year over year to $196 million in fiscal 2023. Bay Street then expects sales to surge by 40% to $275.6 million. Comparatively, its earnings per loss are forecast to narrow from $5.16 per share in 2022 to $0.22 per share in 2024.
Valued at a forward price to 2024 sales multiple of 1.7, ACB stock is not too expensive. But its weak balance sheet, million-dollar losses, and low cash balance make ACB stock a high-risk bet.
Analysts expect ACB stock to gain 50% in the next 12 months. But I believe there are much better stocks on the TSX that offer a better risk/reward profile to investors.