- Aurora's recent quarter showed that the company is still a long ways away from their promise of profitability
- Recent surge in stock price is a blessing in disguise for the bears and shorts
- Take your profits and RUN!
I often times find that sound investing fundamentals get thrown out the window when a stock goes up big in a short period of time. Many times, it's FOMO (fear of missing out). In Aurora's case, it was the perceived good earnings report, made available on May 14th(1).
Reverse Split - A Big No No
It seems that everyone has already forgotten that just last week on May 11(2), Aurora did a 12 to 1 reverse split. Generally reverse splits are terrible for investors and should be taken as a last resort action by management, but when is the last time Aurora actually cared about shareholders? I do want to put some emphasis on the reverse split because this is not an insignificant event. What was the reason for the reverse split? The share price was too low, and the share price was too low, is because Aurora's management has consistently over promised and under delivered. Now that the share price is back to a reasonable number, management doesn't have to worry about the share price as much, and they definitely don't have to worry about potential delisting anymore. But what about you the investor? If you've been a long term holder of Aurora your buy in price is now 12 times higher. As I see it, the recent 'squeeze' of retail shorts has only created a bigger opportunity for institutional bears to pile right back on given the higher price. The number of 'bag holders' in Aurora has only gotten worse over the last few months, as evidenced by the infamous RobinHood graph below (pre stock split numbers shown here):
What Lies In The Numbers
Now that we've gone over the reverse stock split and why it is terrible for investors, let's cover the earnings report which, i'll admit showed improvement over the past quarter but it still doesn't get me excited for Aurora's future. If you have been a long term holder of Aurora, you'll want to pay attention. Here are the hard hitting numbers:
- Net revenue was approximately 75 million, up from around 55 million in Q2.
- SG&A (Sales, General, Administration) costs outdid revenue at about 80 million.
- Change in inventory of Aurora's biological assets continues to contribute to Aurora's gross profit / loss, which is misleading for investors who do not pay attention to the detailed numbers.
- Overall Net loss of 137 million, which was excluded from Aurora's PR, and had to be found in the SEDAR filing.
- Cost of sales at around 43.6 million (excluding depreciation) represents a gross margin of around 42% which is still too low
The only positive that I found from this report is that Aurora continues to reduce their costs (albeit not fast enough), and revenue has gone up. They still however continue to over promise investors that they will be profitable sooner rather than later, stating EBIDTA profitability by Q1 2021. An important thing to note, was that the "Daily Special", Aurora's budget high quantity product, has been a key contributor to Aurora's revenue numbers in this report. However last I recall, Aurora wasn't making any money on these products, and there are other brands (notably Pure Sunfarms) who are able to undercut Aurora's budget products on price, and are making money doing so. Aurora also continues to exclude depreciation and amortization, in their overall cost per gram numbers which came in at around $0.85 cents, a good number on it's on but it doesn't tell the whole story.
What It Takes To Impress Me
What it will take for Aurora Cannabis to impress me you may ask? For starters, let's include the loss numbers in the report so investors can see the real numbers for themselves. Lowering costs further into the 60 to 70 cent range per gram would also be a big positive, Aurora has already stated that they are on track to lowering SG&A costs further, but I'll believe them when I see the numbers for myself. Under promise and over deliver for once, Aurora's management has constantly been caught with their pants down, especially when they missed the low end of their own guidance in last year's quarterly earnings.
If you have made a killing on your Aurora shares recently, take your profits and RUN! If you are long time bag holder in Aurora, consider taking some money off the table. If you are considering buying Aurora, I would hold off till at least their Q4 earnings report, to see if the new management really is serious about rewarding their shareholders with long term value creation and sustained move towards profitability organically.
About The Author
I am an electrical engineering graduate from Carleton University, and have always had a keen interest in investing. I have been following events as they unfold in the cannabis space in Canada since 2017 and have always had the opinion that decriminalization is the way to go as it reduces drug related crime and can be monetized as a source of tax revenue for the government. My goal is to help people who invest in a risky space like cannabis understand what to look for, as the amount of information available is often overwhelming for new investors. Aside from that, there are several companies all competing with each other to get your investment dollars!