Written by Sergeo Domtchenko
The Coronavirus pandemic has left the healthcare industry caught up in the middle of a frenzy. The biotech race is heating up. Unsurprisingly, biopharmaceutical companies have seen colossal investor backing over the past few weeks.
However, what you may not know is that the cannabis industry is suffering. Since the beginning of the year, the Global Cannabis Stock Index nosedived by more than 43%.
Does this present investors within an exciting opportunity?
Article Outline: 1. Aurora's quarterly financials. 2. How the market reacted to the news? 3. Is ACB worth the investment?
Aurora’s 2019-20 3rd Quarter Financials
- Third-quarter revenues rose by 34% = C$75 million.
- Recreational marijuana sales totalled C$41.5 million.
- Medicinal marijuana sales totalled C$31.9 million.
- Net loss improved by 14.2% = C$137.4 million.
- Selling, general and administrative expenses fell by 11.1% = C$40 million.
Today, Aurora reported results for Q3 2020 and provided an update on the progress we’ve achieved since Q2 to re-focus our business on the path to profitability: https://t.co/6tDTG3EWHU $ACB pic.twitter.com/rgRM2d0N9w
— Aurora Cannabis (@Aurora_MMJ) May 14, 2020
Aurora Cannabis’ (NYSE: ACB) sales skyrocketed for Q1 2020. During a conference call, Aurora executives noted that they saw increased levels of stockpiling amongst their customers between January to February. Also, sales in the “Daily Special” pot brand surged as price-sensitive consumers looked for new outlets to alleviate stress. However, sales tapered off in March as buyers returned to pre-pandemic levels. The pattern of sudden sales surges followed by a decline is also appearing in supermarkets and online subscriptions.
Company executives stated that COVID-19 hadn’t had much bearing on Q3 results, as medicinal cannabis is seen as an essential service in the U.S. and Europe. However, Interim Chief Executive, Michael Singer said that “The coronavirus will have a greater effect on the company’s results in Q4.”
How Did the Markets React?
Positive earnings triggered a 16.7% increase in ACB. Investors rallied behind the stock as the quarterly financials defied the forecasts of many market analysts. FactSet had predicted quarterly revenue of C$66.7 million and a net loss of 77 cents a share. Hence, it should come as no surprise why investors backed Aurora Cannabis.
Is Aurora Worth the Investment?
Before I start, I am obliged to remind our viewers that this is not advice, only general commentary from my extensive research in this area.
Short answer: No (opinion not advice).
Pre-COVID-19, Aurora posted a 349.2% increase in revenues in 2019 to U.S. $247.9 million. Revenue growth was accompanied by a healthy P/E ratio of 30.74. However, the company holds areas of severe financial concern.
Firstly, this biotech is not profitable. In 2019, the company posted a net profit ratio of -117.3%. This was accompanied by a poor EPS value and ROI ratio of 0.22 and -6.6% respectively. Moreover, the cannabis producer posted a poor cash flow to assets analysis result of 0.05. When compared to the generally accepted standard of 0.3, this illustrates the inefficient asset structure that is present within the business.
Secondly, the current ratio of Aurora deteriorated by over 140% to 152.2% in 2019. The deterioration in Aurora’s current ratio can be attributed to the increase in the accounts receivable turnover ratio to 125.5 days. When combined with the D/E of 25.4%, it begs the question of why management is not capitalising on the low-interest environment to expand operations?
Finally, like most biopharmaceutical companies, Aurora Cannabis Inc. does not hand out dividends. Thus, investors can only make a profit through a capital gain.
Despite, the current financial nightmare the cannabis industry holds huge upside potential. Cannabis should become an integral part of society. Especially in the medical, hemp (industrial production), and plant-based protein domains.
Cannabis is yet to take off. It seems COVID-19 is delaying the growth in the cannabis industry. Ultimately causing the prices the drop. However, once the industry does takeoff, the nightmarish financials should transform into an investor’s dream. Thus, if you believe in Aurora Cannabis products and the emergence of the sector, an attractive price could show in the coming weeks (opinion, not advice).
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Sergeo Domtchenko, Associate of YIG.