You really can't find too much to complain about with Aurora Cannabis' (NYSE: ACB) fiscal 2019 third-quarter results. The Canadian marijuana producer delivered strong sales growth that was better than many expected. Even though Aurora posted a big net loss, most of it stemmed from a noncash fair value loss in the company's convertible notes. And that fair value loss was due to a jump in Aurora's stock price, so that's actually a good thing.
Not only did Aurora turn in great Q3 results, but the company also provided several reasons to be optimistic about its future. International sales are increasing significantly. Its production costs are declining. Yet despite so much good news, though, there are still four unanswered questions for Aurora that are very important to investors.
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1. When will a partnership deal be struck?
Anyone hoping for more details on a potential partnership with a major company outside the cannabis industry came away disappointed after Aurora's Q3 update. In March, Aurora announced that it had signed up Nelson Peltz as a strategic advisor. Peltz is the CEO of multibillion-dollar investment firm Trian Fund Management. He has extensive ties in the consumer packaged goods industry.
But Aurora didn't provide any new information in its Q3 conference call on how the hunt for partners is going. Some might have even gotten the impression that Chief Corporate Officer Cam Battley was downplaying the search for a partner somewhat, with his statement that Aurora is working with Peltz "on multiple initiatives, including our partnership strategy."
Tilray CEO Brendan Kennedy stated in his company's quarterly conference call that Tilray "has been inundated with contacts from Fortune 500 companies who are interested in exploring partnerships" with the company. So far, we have no idea how many companies Aurora might have talked with about potential partnerships or how far any of those discussions have progressed.
2. What's the plan for entering the U.S.?
Speaking of Tilray, it's already in the U.S. hemp market thanks to the recent acquisition of Manitoba Harvest. Canopy Growth is building a large-scale hemp production facility in New York state and expects to have hemp CBD products on the market by the end of the year. However, we still don't know what Aurora's plans for entering the U.S. are.
Aurora Cannabis CEO Terry Booth said in the Q3 conference call that his company "is not being blind to what's going on in the United States." He noted that Aurora's spin-off company Australis Capital is doing deals in the U.S. and that Aurora has rights to buy a significant stake in the company in the future. But Booth added that Aurora's strategy to enter the U.S. market is "confidential."
3. Will the big bet on capacity expansion pay off?
Aurora currently can produce around 150,000 kilograms of cannabis on an annualized basis. The company is busy ramping up capacity even more.
During Aurora's Q3 conference call, Cowen analyst Vivien Azer asked Battley about the rationale for building up so much production capacity when there could be an oversupply situation over the long term. Battley replied that Aurora doesn't "see any shortage anytime soon." Booth said he still loses sleep over being able to supply enough cannabis for the global market.
The reality, though, is that we simply don't know at this point whether Aurora's big bet on capacity expansion will pay off anytime soon. If international medical cannabis markets don't grow as quickly as expected, Aurora could have more capacity than it needs.
4. How much additional dilution is on the way?
It looks as if Aurora is on track to achieve positive EBITDA in its fiscal fourth quarter, which ends on June 30. But positive EBITDA doesn't mean Aurora will be profitable. There's still a big question for the company regarding how much additional dilution might be on the way.
This isn't a minor issue. Aurora has been the biggest diluter in the value of existing shares in the Canadian cannabis industry. Last month, the company announced that it had filed the needed regulatory paperwork in the U.S. and in Canada to raise up to $750 million by issuing new securities.
Canopy Growth doesn't have to worry about this problem thanks to the huge cash infusion it received from partnering with Constellation Brands. But Aurora doesn't plan to give up an equity stake with any partnership deal it might make.
The cost of uncertainty
I think Aurora has demonstrated that it's on the right track both in the Canadian and international markets. However, I also suspect that the company's unanswered questions are holding the stock back to some extent.
Yes, I know Aurora's shares have soared more than 70% so far this year. But I think the company's market cap could be much closer to that of Canopy Growth if investors were confident about Aurora's partnering strategy, its U.S. expansion plans, its capacity expansion, and its capital needs.
The future appears to be bright for Aurora. But, in my view, the sooner the company can provide answers to the open questions, the better off it -- and its shareholders -- will be.
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