As Aurora Cannabis (ACB) flounders back close to $1, the negative atmosphere surrounding the stock shouldn’t completely overshadow the opportunities for the Canadian cannabis company in 2020 and beyond. The company has substantial catalysts in 2020 including additional retail stores in Canada, the rollout of Cannabis 2.0 products and global expansion including the U.S. CBD market. This article is the third article discussing the 2020 catalysts for Aurora Cannabis with a focus on the global expansion.
Image Source: Aurora Cannabis website
The original investment thesis of the Canadian cannabis LPs was the massive possibilities of global cannabis expansion. With Canada being a relatively small market, the ability to expand beyond the border was a huge positive.
With the U.S. cannabis companies locked out of those markets and the major stock exchanges due to cannabis remaining illegal at the federal level, the opportunity for Canadian cannabis LPs was forecast as almost unlimited. Unfortunately, the only global location that has worked out is the U.S., the one location where the Canadian companies listed on major stock exchanges in the U.S. aren’t able to conduct business.
According to estimates from Arcview Market Research and BDS Analytics, the U.S. cannabis market will hit $16.2 billion this year while the global market will only reach $20.6 billion. Aurora Cannabis is blocked out of over 75% of the market.
Even going back to February, Aurora Cannabis highly promoted operations in 21 international markets while the forecasts only predict revenues in Europe and Latin America reaching $3.0 billion in 2022. Back in October, the company was active in 25 countries and had locations spread out all over Europe and in Australia and South America.
Source: Aurora Cannabis February 2020 presentation
With the company generating an EBITDA loss of C$80 million in the December quarter and forecasting limited FQ3 revenue growth, the big question always existed was why Aurora Cannabis was operating in countries like Luxembourg. The benefit was clearly not worth the efforts in a very underdeveloped global cannabis market, with the Canadian cannabis company wildly burning cash chasing too many opportunities.
For FQ2, Aurora Cannabis saw international revenues dip to only C$1.8 million due to the now resolved suspension of sales in Germany. While Germany has high expectations for at least doubling medical cannabis imports in 2020, the coronavirus outbreak is bound to shut down most of the other countries looking to implement new cannabis rules to open up their markets. The company had normalized international cannabis revenues of C$5.0 million during FQ1 and investors should expect a return to those revenue levels.
Source: Aurora Cannabis MD&A FQ2’20
Along with the restructuring plan, the company announced the intentions to only focus on established international medical markets. The company hasn’t provided any details on the scaled-back global operations, but one shouldn’t expect this move to interrupt long-term revenue potential as a stronger Aurora Cannabis can eventually re-enter developing global markets.
The bigger key is for Aurora Cannabis to restrict spending to only viable operations and reduce the quarterly operating expense base to C$45 million.
U.S. CBD Market
Similar to the global cannabis market, the U.S. cannabidiol (CBD) market offers huge long-term opportunities and tons of short-term issues. Aurora Cannabis has to invest sparse resources effectively in order to maintain the growth optionality without burning millions in cash on a monthly and quarterly basis.
Due to the U.S. FDA restrictions and uncertain regulations on CBD in food products, the sales trajectory of the sector is highly unknown. Market leader Charlotte’s Web Holdings (OTCQX:CWBHF) just missed revenue estimates due to a competitive market in the natural grocery sector where a full spectrum of hemp-infused CBD products are sold.
As Aurora Cannabis highlights via their presentation, the U.S. CBD sales have a wide range of possible outcomes by 2022. Jefferies has a low-end market target of $3.5 billion and BDS Analytics still estimated a market size of $12.3 billion.
A big issue with the coronavirus shutdown is that Congress and the FDA aren’t actively working towards a solution allowing the removal of any FDA uncertainty surrounding CBD in food products. Originally, the FDA wanted additional testing, but Congress is pushing bill H.R. 5587 to promote removing the requirement for the FDA to treat CBD as a declassified drug requiring testing.
The betting odds are for either a Congressional bill or FDA testing allowing for CBD food products hitting the market by 2022, allowing for the opening up of the CBD market. Until then, Aurora Cannabis needs to reduce spending in this area.
The company has global hemp operations via Agropro in Lithuania, Latvia and Estonia with harvesting of ~9,000 acres. An additional 435 acres were planted at their ICC Labs subsidiary in Uruguay with a potential yield of 100,000 kg of raw material in April.
One shouldn’t expect much from this division with a market leader such as CWH already in 11,000 retail stores only having analyst revenue estimates for 2020 of $110 million. The company purchased Abacus Health Products (OTCPK:ABAHF) for access to an additional 3,000 unique retail stores plus over 16,500 healthcare practitioners. Yet, the current combined revenue estimates for this year are only $150 million. The combined expectations before the FDA restrictions were above $400 million, so the market opportunity exists in the future, but the market has large limitations in the current climate.
The key investor takeaway is that global expansion remains a major catalyst for Aurora Cannabis long term. In the near term, the company must aggressively cut back on operations outside medical cannabis in Germany and CBD in the U.S. The coronavirus outbreak has helped boost cannabis sales in Canada and the U.S., so additional Canadian retail stores and Cannabis 2.0 products are the growth mechanisms for 2020 while global expansion is likely being pushed into a 2021 story for markets still closed now.
The stock is a buy around $1 based on strong sales in the Canadian market. The company should start seeing sales rebound with the ability for consensus sales to reach estimates of C$440 million in FY21. Aurora Cannabis only trades at 3-4x sales estimates now.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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