Should Aurora Exit Recreational Market? Analysts Dissect Cannabis Co. Earnings

Canadian cannabis company Aurora Cannabis Inc. ACB ACB posted its third-quarter of fiscal 2021 financial results on Thursday with revenue of CA$58.4 million ($48.1 million), down by 19.5% year-over-year, and 17% sequentially.

The Edmonton, Alberta-based company also revealed a negative adjusted EBITDA of CA$24 million, which compares to a loss of CA$49.6 million in the same period of the prior year. It has missed the Zack Consensus Estimates for loss per share of 17 cents, reporting a loss of 24 cents per share.  

The Analysts

Following the new earnings report, Cantor Fitzgerald’s analyst Pablo Zuanic kept a “Neutral” rating on Aurora’s stock but reduced their price target to CA$9.00 from CA$11.25.  

BofA’s analyst Heather Balsky reiterated a “Neutral” rating on the stock and lowered their price objective to CA$11.00 from CA$12.00.

Cantor Recognizes Aurora’s Dominance In Medical Market And In Export Activities

Zuanic lowered their price target on Aurora’s stock based on reduced sales projections and general sectoral derating.  

Even though the company had one of the worst results of loss per share in the domestic recreational cannabis market, its dominance in the domestic medical market (almost 20% share, compared to the top five companies owning 40% share) and in exports (25% share) should be recognized, explained Zuanic in a Friday note.

Aurora’s leadership team noted that an upswing in the recreational market requires time, which is why the company is placing its efforts on cost-saving.

Zuanic went further, asking whether exiting from domestic recreational cannabis would make sense for Aurora.

“Certainly, the company has greater international optionality than the Canadian LP average, in our view,” Zuanic concluded.

BofA Says Results Were Worse Than Expected, But Problems Should Be Temporary

Even though BofA was expecting depressing Canadian cannabis sales because of the impact of the global pandemic, Aurora’s sales results were worse than projected, wrote Balsky in a Friday note.

According to the analyst, these problems are temporary but will remain through the following quarter.

Aurora’s third-quarter sales were down 18% quarter-over-quarter and 15% below BofA’s estimates. “The miss was due to weaker than expected adult-use sales (-37% q/q and 34% below our view) and regulatory changes in Israel that led to a pause in sell-in,” Balsky explained.

The company’s gross margins should expand to around 42.5% in fiscal 2023, compared to 28.3% in the third quarter of fiscal 2021, “driven by cost savings, scaling on higher sales, and mix shift benefits.”

Balsky further estimated Aurora would achieve EBITDA of $19 million by the fourth quarter of fiscal 2023.

In addition, BofA lowered their fiscal 2022/2023 sales estimates by 19.9%, based on which it also lowered their price target on the stock.

Balsky said the company’s leadership in the medical business should not be overlooked and pointed out the importance of the adult-use market as well. Putting it into perspective, the analyst noted that Colorado retail sales last year amounted to $1.7 billion, whereas medical sales hit $443 million.

The Price Action

Aurora’s shares were trading 6.01% lower at $6.88 per share at the time of writing.

Photo by Esteban Lopez on Unsplash