Heading into another round of earnings reports, cannabis investors held their collective breath. After several rough sessions, sector leaders like Aurora Cannabis (NYSE:ACB) needed a strong narrative. Having already issued its most-recent report in May, ACB stock depended on one of its competitors to provide that narrative. And that competitor? That was Canopy Growth (NYSE:CGC) and the news wasn’t that great.
Heading into the fourth-quarter disclosure, analysts pegged consensus earnings per share at a loss of 32 cents CAD (24 cents). Unfortunately, Canopy badly missed the target, coming in with a loss of 98 cents CAD. Moreover, the adjusted EBITDA loss registered at 97.7 million CAD against an estimated loss of 63.8 million. The only positive was CGC delivered revenue of 94.1 million CAD, up against the forecast of 92.2 million. However, that wasn’t enough to save Aurora stock and other marijuana players.
Following Canopy’s Q4 earnings report, CGC stock absorbed a staggering loss of 8% in the markets. Although faring much better, Aurora Cannabis stock still slipped nearly 2%. For those cannabis contrarians who were hoping to get a respite from the volatility, they got more red ink.
Does that mean investors should avoid ACB stock moving forward? As long as you recognize the risks in the cannabis sector, I believe this discount represents an opportunity. That’s because we still have a fundamental disconnect associated with marijuana investments.
Once this misunderstanding is gone, we should eventually see stable performance from Aurora stock and similar names.
ACB Stock Narrative Hasn’t Changed
What’s perplexing to me is that the markets insist on punishing cannabis equities like ACB stock on the same news. If you look back at recent earnings report for the top players, it’s usually the same theme. You could probably just switch out the names and few will be the wiser.
I say this because both Aurora and Canopy produced essentially the same report; that is, dramatic earnings losses against expectations, but with promising sales data. For ACB’s Q3 of their fiscal 2019, it brought in losses of 16 cents CAD against an estimated loss of 5 cents CAD. However, revenue more than quadrupled on a year-over-year basis.
While Aurora stock briefly popped, it quickly sparked a decidedly bearish trend line. Since the beginning of April, ACB has shed slightly more than 18% of its market value.
But what’s actually changed in the marijuana industry? Broadly speaking, I’d argue that absolutely nothing has transpired to justify shifting the bullish long-term view of Aurora Cannabis stock.
Mainly, very few people who bought ACB stock did so because they thought Canada alone would sustain this burgeoning industry. I appreciate our northern neighbors for stepping into the 21st century while we remain seemingly mired in the 18th.
But let’s also face some hard facts: Canada has a population numbering approximately 37 million people. In contrast, just the state of California alone levers 39.6 million. Plus, immigration trends will likely spike this tally much higher. That means Aurora speculators were really gambling beyond the Canadian market.
The takeaway then for ACB stock is to avoid getting bogged down with the details. Of course, results will run into the red. Currently, the focus of cannabis-based companies is to establish a dominant industry presence, not turn into a dividend aristocrat.
Aurora Stock Suffers from a Distorted View
If that’s the case, the markets should stop judging ACB stock on common benchmarks like earnings per share. For the foreseeable future, most marijuana companies will not deliver consistently positive profitability metrics. Really, if you care about the sustainability of this industry, you want to see red ink.
Let me walk back this statement slightly. Obviously in an ideal world, you never want to see negative anything. But such concepts are fairy tales. Back on earth, cannabis firms don’t have much capital to play with. They also can’t seek traditional financing due to institutional fears or reservations about legal marijuana.
Therefore, they must make do with what they have. Right now, smart companies like Aurora are busy acquiring firms that will lay the foundations for future developments. As a prime example, I spoke positively about Aurora’s acquisition of Whistler Medical Marijuana. With the low-hanging fruit gone, cannabis players will distinguish themselves through quality products.
That’s what Whistler brings and, along with other key assets, that will ultimately drive Aurora stock higher over the long haul.
But you don’t hear this angle of trading off nearer-term benefits for longer-term potential in most marijuana earnings analyses. That’s why I don’t pay too much attention to the earnings hype, both good and bad. For me, such considerations detract from the bigger picture.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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