Canadian marijuana companies have grossly underperformed the broader markets in the last three years. Canada legalized marijuana for recreational use in October 2018, driving cannabis stocks toward all-time highs. However, since then cannabis producers have been wrestling with slow rollout of retail stores which negatively impacted revenue growth.
Additionally, marijuana companies also had to contend with competition from Canada's illegal market, high inventory levels, million-dollar write-downs, widening losses, and a global pandemic. Throw in a broader market sell-off, a challenging macro-environment, and the prospect of an upcoming recession, and investors are staring right down the barrel.
One of the worst-performing cannabis stocks is Aurora Cannabis (NASDAQ: ACB), which is currently trading 99% below all-time highs, valuing the company at $370 million by market cap. Despite its depressed valuation, Aurora Cannabis remains a high-risk bet for a variety of reasons.
While Aurora Cannabis is part of an expanding addressable market, it is struggling to expand its top line. As a result, its sales have fallen from CA$279 million in fiscal 2020 to CA$245 million in fiscal 2021(ended in June). Analysts tracking the company expect sales to decline by 8.7% year-over-year to CA$223.8 million in fiscal 2022. Further, Aurora Cannabis has also reported an operating loss of over CA$1.11 billion in the last four fiscal years.
Due to its massive losses, Aurora Cannabis had to raise equity capital several times in the last few years, resulting in shareholder dilution and lower share prices.
The company went on an acquisition spree when Canada legalized marijuana and overpaid for a majority of its deals, resulting in goodwill write-downs. In fact, Aurora's goodwill and other intangible assets have fallen from CA$3.86 billion in fiscal 2020 to CA$1.25 billion in fiscal 2021.
Aurora Cannabis is valued at 2.2x forward sales which is not too expensive. However, the company's weak fundamentals indicate it will continue to underperform the broader markets going forward.
At the start of fiscal 2022, Aurora Cannabis emphasized it would narrow its product portfolio to focus on the high-margin medical marijuana segment and improve the bottom-line. In Q3 of fiscal 2022, Aurora's revenue declined by 9% year-over-year to CA$50 million. Sales were down sequentially by 17% as recreational sales fell by 43% to CA$10 million.
Aurora Cannabis attributed its tepid quarterly results to pricing pressures impacting marijuana producers. While medical marijuana sales rose 8% to CA$39 million Aurora Cannabis reported an adjusted EBITDA loss of CA$12 million in the March quarter.
Aurora Cannabis claimed it will report a positive adjusted EBITDA by the end of fiscal 2023.
However, it has not delivered on its promises, as the company's management initially expected to report an EBITDA profit back in Q1 of fiscal 2021.
Aurora Cannabis will have to improve revenue while lowering its cost structure for it to post consistent profits. It now expects to save between $150 million and $170 million by the first half of fiscal 2023.
Aurora's EBITDA loss in Q3 of fiscal 2021 stood at CA$20 million which means it has reduced its losses in the last year. However, its revenue has also declined in this period, making investors extremely nervous.
During its Q3 earnings call, Aurora Cannabis disclosed plans to launch 40 new products across its medical and recreational marijuana segments. But the extensive product launch will also drain its cash balance that stands at CA$455 million at the end of Q3.
Aurora Cannabis is expected to trail the equity market in 2022 and beyond, especially if it fails to turn profitable. Moreover, its outstanding shares have more than doubled in the last two years and the company's high cash burn rate makes ACB stock extremely vulnerable right now.
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