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Aurora Makes Its Case to Be Pot's Dominant Player

Dan Caplinger, The Motley Fool

Marijuana stocks got off to a great start in 2019, and Aurora Cannabis (NYSE: ACB) found itself among the top-performing cannabis companies to begin the year. Yet investors have had to wait impatiently for news about just how well Aurora and its peers have done in capturing the full potential of the Canadian recreational cannabis market and in seeking to grow their presence in markets beyond Canada. Aurora has worked hard to get itself in prime position to become the dominant supplier of high-quality cannabis products worldwide, and bullish shareholders have been hungry to learn more about how all those efforts are going.

Coming into its fiscal third-quarter financial report, Aurora investors demanded signs that the company could sustain its leadership role and make headway into securing its prospects against intense competition. Aurora's results revealed both the extent of its efforts and their costs, but they made many investors feel more comfortable about what's down the road for the Canadian cannabis company.

Dark greenhouse with dim lighting and rows of shelves of cannabis plants.

Image source: Aurora Cannabis.

Aurora harvests healthy sales growth

Aurora Cannabis' fiscal third-quarter results gave welcome news on the state of the global cannabis market. Net revenue of 65.1 million Canadian dollars came in 20% above Aurora's sales three months ago and more than quadrupled its year-earlier revenue totals. As we've seen recently, net losses once again ballooned, climbing eightfold to CA$158.4 million.

The biggest sign of Aurora's success came from its production and sales volume numbers. The pot producer said that it grew 15,590 kilos of cannabis during the quarter, which was double what it produced just three months earlier and up almost 13 times from its production figures a year ago. On the sales front, 9,160 kilos sold was a more modest 31% rise from the fiscal second quarter, but it was still up more than 575% from year-ago levels.

Aurora's sales mix was balanced. Revenue from medical marijuana was only CA$500,000 less than sales from recreational cannabis. Aurora's budding European Union-based business also did well, seeing dried medical cannabis sales climb 40% since the previous quarter. In terms of growth, Canadian recreational consumer sales jumped 37%, compared to just an 8% rise on the medical side in Canada. Yet to some extent, that's to be expected with the legalization of recreational cannabis, as those who want to use marijuana products for health reasons but don't want to jump through the hoops of working with a medical professional to obtain medical marijuana can simply self-medicate with similar recreational products.

CEO Terry Booth was pleased with the results. "I'm exceptionally proud of our company and team," Booth said, "as Aurora continues to deliver on our domestic and international growth strategy." The CEO noted that even with some challenges from the rollout of recreational marijuana in Canada, he believes Aurora can still build a sustainable business over the long run.

The key to Aurora's future

One of the most promising aspects of Aurora's quarter, though, was the evidence that its growth initiatives are starting to reap rewards beyond simply boosting revenue. Aurora also managed to cut its costs dramatically, as average cash cost to produce its cannabis plunged more than 25% to $1.42 per gram. The company attributed the drop to the size and efficiency of the Aurora Sky facility near Edmonton International Airport in Alberta, and it's likely that Aurora will be able to build even more economies of scale as Aurora Sky and the Bradford facility have reached full capacity.

Aurora sees its capacity paying off in the coming quarter. The cannabis company set a production target of 25,000 kilos for the fourth quarter, and it wants to go beyond leaf to have more vaping products and edibles ready for launch later in 2019.

Yet acquisitions and partnerships will still play a major role going forward. In particular, cannabis oil production has been a chokepoint for Aurora, but it's working with Radient Technologies to reverse that problem and boost extra-based product availability in the coming months. Meanwhile, recent acquisitions of Hempco Food and Fiber as well as Chemi Pharmaceuticals should help flesh out Aurora's corporate profile while adding lucrative new product lines.

Few marijuana stocks have the capacity to be in the same league as Aurora Cannabis, and many of those that do still face significant competitive disadvantages against the early mover. Given the rapid evolution in the cannabis space, Aurora is far from having a lock on the marijuana market going forward. However, with important initiatives in place to bolster its already strong position in the industry, Aurora Cannabis has the potential to sustain its leadership role among cannabis companies well into the future.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.