Today we look at reasons why shares of Aurora Cannabis Inc. (TSX:ACB), one of the Canadian marijuana stocks, could recover in a big way when the bulls return to the cannabis sector
SmallCapPower | October 2, 2019: Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB), one of the Canadian cannabis stocks and Canada’s second-largest cannabis cultivator by market cap, has been in the doldrums recently along with the rest of the cannabis sector. Aurora shares have plummeted more than 72% since its October 17, 2018 high, while the Horizons Marijuana Life Sciences Index ETF (TSX:HMMJ) is down 56% over the same time period. Additionally, Aurora Cannabis stock is in oversold territory, with its daily RSI at 26.1, and is currently trading below its 50-Day moving average ($7.77), and 200-Day moving average ($9.58). Aurora’s share price as at September 30, 2019 was $5.52. Today we are going to look at what makes Aurora Cannabis shares a good potential rebound play when the cannabis sector recovers.
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Figure 1: Canadian Cannabis Market Share
Source: The Weed Stocks Wiki
Canadian market share leader. Based on Q2/19 results, Aurora Cannabis has now overtaken Canopy Growth as the market share leader in Canada. With $94.5M in cannabis revenue, Aurora leads with the highest total revenue compared with any Canadian cannabis company. Second-quarter kilogram equivalents sold were 69% higher compared to Aurora’s closest peer. In the quarter, Aurora Cannabis reported ~5,600 kg in wholesale revenue at a price of $3.60/gram. Management indicated that this was a one-off wholesale sale of trim to a cannabis extractor and would likely not be repeated in subsequent quarters. Aurora’s Q2/19 results are promising but investors will be looking out for Q3/19 to see if Aurora Cannabis can maintain its market leadership position in Canada.
Figure 2: Aurora Cannabis Inc’s Gross Margin Profile
Source: Company Reports, Ubika
Industry-leading gross margins. Aurora Cannabis Inc’s gross margins for Q2/19 were 56%, which is the second best in the industry. Supreme Cannabis has taken the industry lead for best gross margins at 60%, while Organigram came in third with 50% gross margins. Albeit, Organigram had gross margins of 60% during Q2/19, but management indicated that the slip in gross margins was due to a change in plant-growing protocol, and it should revert back to ~60%. Investors should be paying attention to gross margins in subsequent quarters as it gives an indication as to which cannabis companies are running operations most efficiently.
Potential for a strategic partnership. There have been a few big-name partnerships in the cannabis sector: Canopy-Constellation Brands, HEXO-Molson, Tilray-AB-InBev, and Cronos-Altria. Aurora Cannabis has been one of the only major cultivators to be left out. As such, an announcement of a partnership for Aurora could be a significant catalyst for its stock price. Rumours concerning Aurora Cannabis and a partner have occurred before. Its stock rallied 17% in September 2018, following speculation that Coca-Cola was in talks for a CBD partnership with Aurora. Investors should be paying attention after October 17, 2019, as this is the date concentrate and edible products become legal in Canada. Once legal, cultivators can start announcing what products they expect to be selling and could, at this time, give hints of potential partnerships.
Based on Aurora’s market leadership position, strong gross margins, and potential for a partnership, its stock could outperform when the cannabis correction finally ends. And, pardon the bad pun, we think that most of sector selling is already ‘baked’ into Aurora Cannabis Inc’s current stock price.
Shares of Aurora Cannabis closed Tuesday’s trading session down 6.5% to C$5.44. Aurora stock trades at a market cap of C$5.5B.
Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.
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