The current period of earnings reporting is a particularly significant one for the legal cannabis sector. It sheds light onto revenues over the first quarter of a legal recreational market in Canada following the October changes to legislation. Despite well-publicised issues with the retail infrastructure and supply lines struggling to initially cope with the sudden opening up of the legal recreational market in Canada, those investing online in ‘pot stocks’, and those considering it, will be keen to see initial revenues.
On Monday it was the turn of Aurora Cannabis, one of the largest listed Canadian pot stocks. Despite showing a 20% share of the new recreational market in Canada analysts were conflicted on whether the company’s earnings report represented a strong quarter. The stock dropped a little over 2.5% on the NYSE (Aurora has a dual listing on both the NYSE and Toronto Stock Exchange) as investors focused on lower second quarter margins influenced by dropping retail prices and increased production costs. However, the company did show that it has cornered 20% of the recreational use cannabis market in Canada.
Analysts were split over whether the Q2 earnings report represented a positive or negative quarter. Overall sales revenue slightly surpassed the C$52.6 million forecast by a consensus of Bloomberg analysts by coming in at C$54.2 million. However, an overall loss of C$238 million was the bottom line figure as operating margins were pushed down to 54% from 70% a year earlier. Aurora Cannabis put that down to a combination of lower retail prices per gram of cannabis, increased packaging costs and new excise taxes on medical cannabis revenues. Aurora sells both recreational and medical cannabis products.
The company maintained forward guidance that it expects to move into positive EBITDA from the second quarter of the current year. The company’s strategy for the U.S. market was a focus for investors. A move into hemp-derived CBD oil for the U.S. market, which does not contain the psychoactive THC compound associated with recreational marijuana is planned following last month’s Farm Bill, which legalised hemp production in the USA. However, it will not be immediate unlike competitor Canopy Growth’s, who will enter the U.S. through a license to process hemp in New York. Aurora will hold off until unanswered questions around creating and distributing hemp-derived products.
Positive analysts highlighted the fact that this year’s Aurora’s 20% market share in Canada is expected to be worth C$1.2 billion and still leaves plenty of room for growth. The biggest contributor to Aurora’s C$238 net loss was a correction in the share price of ‘pot stocks’ late last year. Having made several acquisitions, their drop in value had to be taken into consideration. However, with the Aurora share price up 45% this year despite yesterday’s drop, that will be expected to reverse in future earnings reports. An increase in production costs by $0.47 a gram to $1.92 was put down to:
“temporary inefficiencies during the scale up production at Aurora Sky as well as increased labour and inventory management cost and preparation from consumer legalization in October.”
This again leaves plenty of room for improvement and longer term investors in Aurora stock are likely to remain positive despite this week’s mixed market response.