Canadian marijuana companies such as Aurora Cannabis (TSX:ACB) have created massive wealth for shareholders in the last five years. Several cannabis stocks, including Aurora Cannabis, were trading near all-time highs when Canada legalized recreational marijuana use six years ago. However, during this period, companies have wrestled with a wide range of industry-related headwinds.
For instance, despite the legalization of marijuana, Canadian licensed producers had to compete with the illegal market, leading to cannibalization. Aurora Cannabis and its peers then expanded manufacturing capabilities aggressively, focusing on catering to rising demand. They also considered acquisitions to gain further traction and paid a hefty premium to fuel inorganic growth. Moreover, established players had to contend with rising competition in multiple markets soon after legalization.
These factors led to an oversupply of cannabis, high inventory levels, negative profit margins, and goodwill write-downs. Today, Aurora Cannabis stock is valued at a market cap of $452 million and trades 99% below all-time highs. Let’s see if ACB stock can recover in the back end of 2024.
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A strong performance in Q1 of 2025
In the fiscal first quarter (Q1) of 2025 (ended in June), Aurora Cannabis reported revenue of $83.4 million, up 12% year over year. It included a contribution of $47.2 million from the higher-margin medical cannabis segment. Notably, Aurora Cannabis reported a gross margin of 43% in Q1, increasing the gross profit to $36 million, up from $32.6 million in the last 12 months.
In Q1, the medical marijuana segment accounted for 57% of total sales and 91% of total adjusted gross profits. In the year-ago period, the medical marijuana business accounted for 56% of net revenue and 77% of gross profits.
Aurora Cannabis ended Q2 with an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $4.9 million, up 87% from the year-ago period. It was the seventh consecutive quarter of positive adjusted EBITDA for the cannabis maker as it continues to benefit from a focus on medical marijuana sales.
Aurora Cannabis grew medical cannabis revenue by 13% due to a 24% growth in international sales. It stated, “The increase in international medical cannabis revenue was primarily due to higher sales in Australia and Germany driven by significant overall growth in those markets as well as increased distribution in the U.K. Adjusted gross margin for medical cannabis was 69%, up from 61% in the year-ago period.”
Importantly, Aurora Cannabis reported a positive free cash flow for the first time in Q1 of fiscal 2025. With $182 million in cash and no debt, Aurora Cannabis has the flexibility to increase capital expenditures in key growth markets.
What is the target price for ACB stock?
Aurora Cannabis expects to gain traction in several international markets, such as Europe and Australia, allowing the company to grow revenue and earnings in the near term.
Aurora Cannabis reported an operating cash flow of $8.9 million in Q1, compared to an outflow of $20.4 million in the year-ago period. It attributed its improving operating cash flow to higher sales, improved contribution margin, and changes in working capital.
Further, Aurora Cannabis achieved its goal of reporting a positive free cash flow goal two quarters ahead of estimates. In Q1, its free cash flow stood at $6.5 million.
It seems that Aurora Cannabis has finally turned around its business and is on the verge of reporting consistent profits. However, it remains a high-risk investment until it can report positive earnings and cash flow across business cycles. Bay Street has an average target price of $9.5 for ACB stock, almost 15% higher than the current trading price of $8.24.
