It’s Not A Good Time To Own Aurora Cannabis

But It Might Be A Good Time To Buy Aurora Cannabis 

It certainly doesn’t look like a good time to own Aurora Cannabis (NYSE: ACB) but it may be time to start loading up on shares again. The company’s stock is down another 10% in the wake of its Q3 earnings with the promise of economic reopenings and U.S. legalization still ahead. While the near-term outlook is poor and getting cloudier by the quarter the long-term outlook remains strong but it may be some time before the expectations become reality. The biggest hurdle for the company right now is the adult-use market and no so much because people don’t want to buy product. Nationwide economic shutdowns in Canada not only prevented retail outlets from opening but put a real hurt on the labor pool. If you can’t grow it and market it you can’t make money selling it. 

"Consistent with many of our peers, the quarter presented challenges in the Canadian adult-use segment. This reinforces the importance of Aurora's broadly diversified business model that balances domestic medical, international medical, and adult-use platforms," stated Miguel Martin, Chief Executive Officer of Aurora Cannabis

Aurora Cannabis Whiffs In Q3 

Aurora Cannabis did not have a good quarter in Q3 but, at the very least, revealed its resilience in the face of tough times. The company brought in just over $55 million (CAD) which is down 25.1% from last year and missed the consensus by a full 2000 basis points of the decline. Net Cannabis Revenue fell -21% despite the surprise inclusion of wholesale revenue for the quarter. The company brought in about $0.760 million through wholesale channels but not enough to offset losses in other areas. 

The medical segment was the strongest and evidence of the company’s transformation plan. Aurora Cannabis is trying to refocus on the medical market and saw that revenue increase 17% YOY. In our opinion, those gains may be illusory because retail demand may have shifted to the medical market and its home-delivery system. The Adult Use market is where all the weakness occurred, sales in that market slumped 53% YOY but should start bouncing back as soon as this quarter but we’ll see about that. 

"we delivered the strongest performance in domestic medical and the best results in international medical cannabis of any Canadian LP during the period. This is critical, because we expect being #1 by revenue in Canada's medical market, the largest federally regulated medical market globally, should translate into global adult-use success in the future as medical regimes evolve to adult-use markets ..." continued Martin. 

On the bottom line, the company reported a net loss but one much less than expected. This is because of less than expected adult-use sales offset by widening gross margins, reduced SG&A, and reduced R&D spending that is all part of the transformation plan. Looking forward, we expect to see operating margins creep toward positive levels as adult-use comes back into play. 

Aurora Cananbis Preps For The Future 

Along with the transformation plan are plans for the future which include the very lucrative U.S. market. The company is well-capitalized with over $525 million in cash it can use to sustain operations, expansions, and acquisitions to further those plans. In addition, the company is preparing for a possibly $300 million at-the-market offering it can use for accretive acquisitions. At face value the news is negative because of its dilutive quality but, longer-term should provide ample value to shareholders if tapped. 

"will provide maximum flexibility to pursue select acquisitions going forward, including within the U.S. ..." But "...given the strength of Aurora's current cash position, it is not expected to need to access the ATM facility without an accretive use of proceeds."

The Technical Outlook: Aurora Cannabis Pulls Back To Support 

Shares of Aurora Cannabis have been pulling back to support levels ever since hitting its Reddit-induced peak. Now, post Q3 release, shares are in capitulation mode and trading at a major support zone we think will produce a bounce late in the summer if not sooner. The indicators are consistent with support and a potential bottom at the $6/$7 level so we are at least optimistic of sideways action if nothing else. The risk for the market is that prices will continue to fall. In that scenario, a move below $6 could take this stock down to the $4 level.