Aurora Cannabis (TSX:ACB) has arguably been the worst-performing marijuana stock in the last five years. Valued at $283 million by market cap, shares of the licensed cannabis producer are down 99% from all-time highs, burning massive investor wealth in the process.
Aurora Cannabis stock was trading at record highs in 2018, just before Canada legalized marijuana for recreational use. During that period, investor optimism was buoyant, resulting in steep valuations for most Canadian cannabis producers.
Aurora Cannabis and its peers plowed in capital to scale up their manufacturing capabilities and gain traction in multiple markets. Further, these companies acquired smaller competitors at a hefty premium to gain market share.
However, the cannabis market is heavily regulated, resulting in the slow rollout of retail stores in major Canadian provinces. The rapid expansion in manufacturing also led to an oversupply of cannabis products in Canada. Moreover, domestic producers had to wrestle with cannibalization of market share from illegal sales.
These factors resulted in higher inventory levels, multi-billion-dollar write-downs, and massive losses for Aurora Cannabis and other TSX marijuana companies.
Let’s see if Aurora Cannabis can help stage a rebound in the next 12 months and recover a portion of its losses going forward.
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How did Aurora Cannabis perform in Q2 of fiscal 2024?
In the fiscal first quarter (Q1) of 2024 (ending in June), Aurora Cannabis reported revenue of $63.4 million, an increase of 30% year over year. It also reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $3.4 million compared to a loss of $6.2 million in the year-ago period.
In recent quarters, Aurora Cannabis has focused on improving its profit margins by increasing sales of medical marijuana products. In fact, after reporting several years of losses, Aurora Cannabis expects to end fiscal 2024 with a positive free cash flow.
However, investors should note that the medical marijuana market is much smaller than the recreational segment. Due to higher profit margins, other companies are also targeting this vertical, which may be one reason why the stock market hasn’t rewarded Aurora’s shift in strategy.
The U.S. may be a massive market
The U.S. is the largest cannabis market in the world, but pot remains illegal at the federal level. In 2023, the U.S. Department of Health and Human Services recommended the country’s Drug Enforcement Administration to declassify marijuana as a Schedule I drug.
Investors are hoping the U.S. will decriminalize and eventually legalize marijuana at the federal level, which may be a key revenue driver for Canadian pot producers.
However, the U.S. already has several cannabis companies that enjoy an entrenched position in markets where the product is legal. Moreover, a majority of these companies are profitable and have a strong balance sheet, making it difficult for new players to capture market share.
Is ACB stock undervalued?
Analysts tracking Aurora Cannabis expect the company to report revenue of $272 million in fiscal 2024 and $314 million in fiscal 2025. Its adjusted loss per share is forecast to narrow from $1.45 per share to $0.47 per share in this period.
ACB stock might seem undervalued, but it remains a high-risk investment. It first needs to report consistent profits while increasing revenue to regain investor confidence.
