Last week, marijuana stock investors were privy to one of the most highly anticipated events of the third quarter -- namely, the release of Aurora Cannabis' (NYSE:ACB) fiscal fourth-quarter operating results.
Even though Aurora trails Canopy Growth in market cap, it's a leader in many respects. The company projects as Canada's leading producer, with an estimated 625,000 kilos of annual run-rate output by the end of fiscal 2020 (which comes on June 30, 2020), and it has a broader international presence than any other marijuana company. Many years down the line, if oversupply and commoditization strikes the dried flower landscape in Canada, this overseas presence should begin to really pay off.
It's also a company that's apparently loved by investors. It's the most-held stock on online investing app Robinhood (an app that's particularly popular with millennials), putting Aurora Cannabis ahead of the likes of Apple and Amazon.com. I also don't doubt that its relatively low share price has a psychological impact on attracting investors, too.
Aurora Cannabis whiffs on its own guidance
But if you took the time to really dig into Aurora Cannabis' fourth-quarter report, which was released after the closing bell on Wednesday, Sept. 11, you likely walked away feeling pretty nervous about the near-term outlook for the marijuana industry.
One of more mind-boggling aspects of Aurora's Q4 report is that the company missed its own previous sales guidance. Just five weeks before lifting the hood on its operating results, the company offered an unaudited update that called for 4100 million Canadian to CA$107 million in Q4 net sales, inclusive of excise taxes paid. You'd think with Aurora giving such a reasonably broad range only five weeks prior to releasing its results that this would have been an accurate assessment of its performance. But that turned out to be wrong, with Aurora's net revenue tallying "only" CA$98.9 million, missing its own guidance, as well as Wall Street's.
For what it's worth, the company's initial projections (from much earlier in 2019) of positive recurring adjusted EBITDA for the fourth quarter were also dashed.
This should seriously worry the cannabis industry
As embarrassing as this might be, though, it pales in comparison to one particular comment in the company' Q4 report. When discussing the company's push toward positive adjusted EBITDA, the press release reads:
In Q4 2019, adjusted EBITDA loss improved 68% to [CA]$11.7 million from [CA]$36.6 million in the prior quarter. Developing a profitable and robust global cannabis company is extremely important to Aurora. In fiscal 2019 Aurora was focused on excellence in execution, and the Company's KPIs [key performance indicators] show its success in this regard. Furthermore, Aurora has addressed previously identified production bottlenecks and continues to see strong sell-through of the Company's products at the retail level. However, the Canadian consumer channel continues to experience challenges at the retail level in key markets and resolution of this issue is beyond the Company's control. Aurora is working closely with all our regulatory and channel partners to streamline distribution as the Company continues to track toward positive adjusted EBITDA on a consolidated basis.
While it's a positive that Aurora saw notable improvements in gross margin, a decrease in "production bottlenecks," and a significant decline in per-gram production costs as economies of scale take shape, it's extremely worrisome that consumer channel challenges are "beyond the Company's control."
Dried flower supply issues will take a while to resolve
It's no secret that supply issues have plagued the recreational Canadian pot industry since adult-use sales were launched on Oct. 17, 2018. These supply problems have manifested in four ways:
- Health Canada has been bogged down with cultivation, processing, and sales license applications. When the year began, it had more than 800 to review, which has led to long wait times for growers.
- Select provinces have been slow to approve physical cannabis store retail licenses.
- Growers and retailers have dealt with a shortage of compliant packaging solutions, leaving unprocessed cannabis sitting in inventory.
- Growers had to wait until they were certain the Cannabis Act would become law before undertaking expensive capacity expansion projects. In many instances, these construction or expansion projects are still under way.
However, we've witnessed progress on the capacity expansion front over the past year, and there's been little talk of compliant packaging shortages among growers of late.
What hasn't ceased, though, are the licensing delays at Health Canada and among certain provinces. Aurora Cannabis' Q4 commentary in its press release confirms that this pervasive problem is going to take a long time to work through, even with changes being implemented by Health Canada.
But wait -- it gets worse
Unfortunately, Aurora's commentary isn't just limited to the dried cannabis spectrum.
On Oct. 17, laws governing derivatives (e.g., edibles, vapes, infused beverages, topicals, and concentrates) are set to go into effect, with these products making their way onto dispensary shelves by mid-December. Although dried cannabis is the most-sold weed product, it tends to generate low margins for marijuana stocks. Meanwhile, derivatives shouldn't face any near-term supply issues or pricing pressures, meaning they'll deliver much juicier margins.
But it's looking like derivative products may not make the splash that was initially expected. That's because all of the supply issues that have plagued the dried cannabis space are now going to be impacting alternative consumption options as well. Even Health Canada has warned that the rollout of these new products will be similar to dried cannabis -- i.e., it could take time for supply to really show up in licensed stores.
That's bad news, because Aurora Cannabis and its peers have been spending a lot of time and money to broaden their product portfolios in advance of this mid-December launch. That probably means that already depressed sale and profit projections for 2019 and/or 2020 are going to need to be trimmed even further.
While the cannabis industry still offers incredible long-term growth potential, these near-term bumps could prove significant.