Why Aurora Cannabis, Canopy, and Sundial Stocks Popped on Friday

What happened

Canadian cannabis company Aurora Cannabis (ACB 14.88%) reported its fiscal third-quarter 2022 earnings last night, and in so doing, sparked a rally across the cannabis sector today. As of 1 p.m. ET, shares of Aurora Cannabis itself are already up 13%, and peer producers Canopy Growth (CGC 9.03%) and Sundial Growers (SNDL 4.03%) are benefiting as well — up 8.5% and 5.9%, respectively.

But was the news really good enough to justify this rally?

So what

Heading into Q3, analysts had forecast that Aurora Cannabis would lose $0.19 per share (0.25 Canadian dollars, and furthermore, this was a pro forma prediction) on sales of $41.5 million — about CA$53.7 million.  

Aurora actually exceeded analyst predictions on sales. Sales for the quarter declined only 9% to CA$50.4 million, with consumer cannabis sales way down — off 43% — but sales of medicinal marijuana up 8%. It was this sales number last night, I suspect, that accounts for investors’ enthusiasm about Aurora Cannabis and its peers today.

On the earnings front, however, the news was less good. Aurora lost about CA$1 billion in fiscal Q3 — which is quite a lot of money for a company valued at less than half a billion U.S. dollars to lose, and works out to roughly CA$4.72 per share according to Aurora’s SEC filing. In the earnings release itself, Aurora didn’t even bother to calculate per share losses, preferring to give its financial results in the form of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), by which metric its losses seemed slimmer — only CA$12.3 million.    

Now what

So, no. To be frank, despite the relatively good sales news, given how much money Aurora is still losing, I’m not at all convinced that the investors bidding up shares of Canopy or Sundial (or Aurora itself for that matter) on this news are making the right call.

That being said, Aurora did try to parlay its “sales beat” into further momentum for its stock, saying that it is doubling down on cost-cutting and planning to reduce its operating costs by CA$150 million to CA$170 million, annually, by fiscal H1 2023 (or in other words, before the end of this calendar year). Aurora further stated that it expects to achieve “adjusted EBITDA profitability” by the end of this year. Helping with that, Aurora noted that gross margins in the medicinal marijuana business improved during the quarter, even as consumer cannabis profit margins continued to deteriorate.

Can Aurora cut its costs fast enough to make up the difference, and deliver its promised “adjusted EBITDA profitability”? Perhaps, and if it succeeds, that might be enough to keep this rally going for it and its peers. That being said, I have to point out that even CA$170 million in cost-cutting won’t make much of a dent in GAAP losses that are running at CA$1 billion. It won’t turn “adjusted EBITDA profitability” into anything resembling actual profitability.

And until Aurora — or any of these cannabis companies for that matter — proves it can earn an actual profit selling marijuana, I won’t be investing my own money in marijuana stocks.