<p>Aurora Cannabis (NYSE: ACB) continues its downward trend and was recently traded at a 52-week low. The company’s results for the second quarter of 2020 did not inspire investors a bit. As markets continue to correct with strong selling pressure, the Aurora stock may soon visit the $ 1 level.
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Aurora reported net sales of CAD 66.6 million, which excluded provisions of CAD 10.6 million. Nevertheless, net revenues from cannabis are in line with the latest guidelines. Interim manager Michael Singer acknowledged that the growth in its core business in medicine and consumer is simply modest. The successful launch of Cannabis 2.0 products across Canada is the only bright spot in the quarter.
The bad news for investors holding the Aurora share is that the hype in the sector is gone. Markets are occupied by coronavirus from China that is spreading all over the world. The global economic downturn will force investors to recalibrate their valuation for speculative investments in the cannabis sector.
So this suggests that the small production cost per gram of CAD 88 cents against the average net selling price of medical cannabis which stabilizes at CAD 7.99 is a small improvement.
Growth catalysts ahead
Earlier, Aurora announced its focus on Cannabis 2.0 would drive growth. But during its conference call, the company said that 2.0 would develop slowly. It said that the good news is that it “handles the business accordingly and [the company feels] very confident in our future prospects. ”
Aurora’s measured approach at launch of 2.0 reduces the risks of operational performance. Still, the bigger issue is the driving speed of groceries. Gummy demand is unknown and needs a strong consumer interest to attract Aurora investors to hold shares. The company said that “the rubbers, they sell as soon as we can get them to the provinces, the provinces order in a lot, let’s say a wise way I think. They prefer to fill in layers as opposed to being superimposed. ”
If consumer interest improves, Aurora has the capacity to increase production when needed. Management can reasonably achieve 20% of its sales from 2.0 products in the next quarter.
Investors will not buy the promised growth catalysts in the future. International medical sales fell from CAD 5 million to just CAD 1.8 million in the second quarter. Aurora blamed a permit problem that damaged sales in Europe. For example, growth in Germany is growing more slowly than expected. Nevertheless, the European Union’s latest certification of good manufacturing practice at the Aurora River plant will have a driving speed of almost 30,000 kg per year.
Aurora reduced staff and stopped capital projects to slow its cash-burning rate. Investors can assume that it reduces staff in IT, personnel and marketing to adapt to the lower demand. It will continue to evaluate Canadian cannabis in medical and consumer markets.
The company gave no clear indication of when it will report a positive result before interest, taxes, depreciation and amortization (EBITDA). But when opportunities arise and the company increases its revenue, it will balance the costs accordingly.
My rating on Aurora Stock
There are 17 analysts who have a price target on Aurora Cannabis shares, and they have an average price target of $ 1.93. Conversely, Simply Wall St warned that the company has less than a year of cash left. Based on its future cash flow, the stock is undervalued by 7.7% and has a fair value of $ 1.45.
If investors assume the following measures in a 5-year discounted cash flow income model, the fair value of the stock is $ 1.76.
Measured value Range Conclusion Discount rate 13.5% -14.5% 14.% Terminal revenue Multiple 12x-15x 13x Fair value $ 1.54- $ 2.16 $ 1.76 Up 15.2% -60.9% 31.1 %
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The Aurora share is still a high-risk speculation, despite the fact that it has already fallen sharply in the past year. Those who invest in growth in the cannabis space should continue with caution.
Chris Lau is a contributing author to InvestorPlace.com and many other financial websites. Chris has over 20 years of investment experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace at Seeking Alpha. He shares his stock choices so that readers get original insights that help improve return on investment. At the time of writing, Chris had no position in any of the above securities.