Aurora Cannabis Inc. U.S.-listed shares slid 9% Friday, as analysts weighed in on weaker-than-expected fiscal second-quarter earnings, and at least one downgraded the stock to sell.
posted a wider-than-expected net loss of C$292.8 million ($230.6 million), or C$1.74 a share, for the quarter to Dec. 31, narrower than the loss of C$1.3 billion, or $C14.25 a share, posted in the year-earlier period.
Revenue net of excise taxes came to C$67.7 million, up from C$55.2 million a year ago. The FactSet consensus was for a smaller loss of 31 cents a share and revenue of C$69.4 million.
MKM analyst Bill Kirk downgraded the stock to sell on the news and said the numbers were “concerning on two fronts.” The company’s consumer cannabis revenue of C$28.6 million was down 17% from the first quarter and at its lowest level since the second quarter of 2019, he wrote in a note to clients. The company’s guidance for positive adjusted EBITDA also failed to materialize and showed deterioration from the first quarter.
“We don’t see a cost-cutting or growth path that gets to near-term positive EBITDA,” Kirk wrote. “For perspective, Aurora collected more in COVID-related subsidies in 2Q than it generated in gross profit dollars.”
Aurora may be further commoditizing its flower offering by outsourcing sales functions and may struggle to distinguish itself from rivals and the excess supply in the Canadian market, said Kirk. With pricing pressures still in play, the company’s decision to push grows into more premium price points “seems like a recipe for consumer/province frustration,” said the analyst.
In an industry that is now showing years of sequential growth, Aurora sold less recreational weed in the quarter than in any full quarter since Canada fully legalized cannabis in October of 2018, he wrote.
“To the company’s credit, Aurora has some strong IP from its MedReleaf acquisition and strong brands in San Rafael and Whistler (both acquired),” said Kirk. “They will try to premiumize around those offerings, but we believe the shift back toward higher price point products will be difficult. Downgrading to Sell, while maintaining our C$9 PT.”
Jefferies analyst Owen Bennett, who rates the stock as underperform, struck a similar tone, saying the numbers offered little reason for bullishness, given the stock’s current valuation.
Like many cannabis stocks, Aurora has been swept up in a broad sector rally driven by expectations of reforms to the U.S.’ strict laws, even though it is not expected to benefit, at least not immediately. The stock has gained 90% in the last three months, and is now the third most expensive in the Canadian sector, after Cronos Group Inc.
First, its Canadian recreational business disappointed, while its progress on margins and costs also underwhelmed,” said Bennett. “Second, it continues to burn cash at a decent clip. With sizable near debt also due, we continue to believe the balance sheet is not strong enough to support a U.S. push, this key to sustain the multiple.”
The company is also unlikely to benefit from the cash expected to flow into the sector if the U.S. opens up, “as most likely any smart institutional money will be moving into US MSOs (multi-state operators),” said Bennett.
Cantor Fitzgerald analyst Pablo Zuanic took a more positive tack, raising his 12-month price target on the stock to C$18 from C$17 but sticking with a neutral rating. Sales, while below consensus, were slightly better than he expected, Zuanic wrote in a note.
Growth of 86% in the international business from the prior quarter was a positive that offset the decline in domestic recreational growth, he said.
“For context, the profitable medical unit (domesc and intl.) contributed 75% of cash gross profit in the Dec quarter, given gross margins were two times those of recreational,” he wrote. “The strategic pivot to profitable SKUs in rec, export growth, and stable SGA bode well for the margin outlook, in our view
(although there is no guidance).”
Zuanic also described Aurora as being “attractively valued” in relative terms after the run-up in the sector. “Top-down valuations for the Canadian group seem stretched, so the current momentum downdraft may continue. That said, we think neutral-rated ACB may have a buffer given its valuation,” which is not as overdone as smaller rivals, said the note.