Compared to the ailing business it was in the past, the Aurora Cannabis (ACB -0.92%) of today is making strategic moves, and it's also operating a lot more efficiently. With a bit more in the way of growth, it might just become a key player in the global medicinal cannabis scene.
But does that make the stock worth buying today, given the industry's ongoing shakeout? Let's examine the cases in favor and against purchasing it.
Why it's a better buy than before
Aurora claims to have the largest market share of the medicinal cannabis market in Canada, and it also has decent positioning in other international medicinal markets like Poland.
Overall, it focuses on medicinal markets more than adult use markets because of the higher margins. In recent times, management has explicitly prioritized its supply of cannabis toward its medicinal operations, causing its adult use revenues to erode. So, at least for the moment, this isn't a company to buy to get exposure to changes in marijuana legalization in the U.S. or other countries. It's intentionally competing in the segments that exist today, rather than positioning for the new segments that may open in the future.
As a result of such moves, as well as a significant amount of cost cutting, over the last three years Aurora's quarterly gross margin increased significantly, reaching nearly 76% in its fiscal fourth quarter of 2024. At the moment, its multi-year cost-cutting drive appears to be in a lull, but it may yet opt to pare its least profitable product segments or unnecessary cultivation capacity.
The more important story is that its top-line growth may slowly be picking up again after a protracted period of struggle. Take a look at this chart.
ACB Revenue (Quarterly) data by YCharts.
Its acquisition of a medicinal marijuana business in Australia in February 2024 means it might make sense to be optimistic for more growth through the rest of this calendar year and beyond, though its success in a new market is far from guaranteed. Alternatively, if it were able to report earnings growth rather than losses, its slow pace of revenue growth would be less of an issue. That prospect might not be realistic today, but in another couple of years, it might be on the table.
Another reason to be optimistic for the company is that it recently paid off all its remaining convertible debt, so it won't need to lose out on as much fuel for growth due to making payments on the interest.
There's not a compelling thesis here
It's undeniably true that Aurora's right-sizing campaign, implemented by CEO Miguel Martin over the last few years, has stabilized the company and prevented its demise. In the future, it may well become a profitable and growing business.
For now, its operating cash flows are still deeply negative, at CAD$68.5 million in the trailing 12-month (TTM) period, and its prospects for top-line growth point to ongoing sluggishness at best. The medicinal cannabis markets simply aren't the centers of growth in the industry right now, even if they're higher-margin.
Similarly, paying down debt is a great move. But it won't actually cause growth or more efficiency on its own. And there's still a gap between Aurora's ambitions to be a leading multinational medical cannabis supplier and its means of actually doing so. It only has CAD$117.4 million in cash as of the most recent quarter, and it can't count on much of anything to shore up that sum in the near term.
In terms of its valuation, its shares are cheap right now. Its price-to-book (P/B) ratio is just 0.6, which speaks to the market's deep pessimism about the company's ability to operate its assets in a way that delivers value to shareholders.
The valuation doesn't necessarily imply a bargain, however. Once again, without a convincing prospect of future growth, investors would just be buying an inexpensive and money-losing stock.
In short, the missing ingredient of the investing thesis for Aurora is a compelling reason to actually invest. Therefore, it's better not to buy it, though it may be worth keeping an eye on if you're keen to get exposure to the medicinal marijuana markets.
