To say Aurora Cannabis (NASDAQ: ACB) has faced some challenges over the years would be a huge understatement. The once-leading cannabis producer in the Canadian marijuana industry is now a shell of its former self. Instead of acquiring large cannabis companies, it's been focusing on more modest opportunities and markets. And to some extent, it has been working.
The company's earnings numbers look better, it's generating more cash flow, and there's reason for a bit of optimism. Investors certainly see a reason to be more bullish -- year to date, Aurora's stock is up an impressive 29%. Has the company truly turned things around, and can it finally be a safe time to invest in the business?
Aurora expects positive free cash flow this year
Aurora and many cannabis companies in Canada have been focusing on improving their financials in recent years, now that growth has slowed in the market. Two key numbers for investors to focus on are net income and free cash flow.
Positive net income is difficult to achieve in the industry, given the impact that changes in fair value can have on the bottom line. Weak margins in a highly competitive Canadian marijuana market don't help, either. This is why many cannabis companies focus on their adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) numbers.
On both adjusted EBITDA and free cash flow, Aurora has been showing progress. Last month, the company reported fiscal fourth-quarter numbers that included positive adjusted EBITDA totaling 1.9 million Canadian dollars ($1.4 million) for the period ended March 31. It marked the sixth-straight quarter of positive adjusted EBITDA.
Although that's encouraging, investors should also note that adjusted EBITDA includes several adjustments and can be quite an accounting exercise to work through. For investors, it can be difficult to gauge whether the company really did that well. After all, Aurora's quarterly net loss was CA$20.8 million, and that's a big transformation into a positive adjusted EBITDA number.
This is why free cash flow may be the more important number for investors. It's a simpler metric to calculate (operating cash flow less capital expenditures) and also tells investors whether the business's day-to-day operations are sustainable. In other words, how likely is it that the company will need to raise money through stock offerings? If free cash flow is positive, it may not need to.
Aurora says it's on target to achieve positive free cash flow by the end of the current calendar year. If that happens, it will be a great milestone for the business.
This may not be enough for investors
Aurora has been slashing costs and becoming more efficient, which is great news for its cash flow and earnings. But for investors to believe this is a hot growth stock again, the company needs to prove that it possesses strong growth opportunities. It's been focusing on international cannabis markets, which offer wider margins. But internationally, the opportunities aren't all that promising.
There are some encouraging opportunities, such as in Germany, where the country recently legalized cannabis for personal use. But with so many countries in the European Union, there's bound to be lots of fragmentation, and the overall market remains small, compared to North America. According to data from Grand View Research, North America made up 76% of the revenue share of the cannabis market in 2023.
Beyond Canada, many rival cannabis companies, such as Tilray Brands and Canopy Growth, are focusing on positioning themselves for opportunities in the U.S. once they open up. While that can be quite a waiting game as legalization is by no means inevitable, if it does happen, it will be a more attractive market to penetrate than anywhere else in the world.
Last quarter, Aurora Cannabis reported just a 5% increase in its top line, compared to the prior-year period, with sales climbing to CA$67.4 million. For the stock to continue rallying and win back growth investors, it may need to find more attractive opportunities beyond just international cannabis markets.
Aurora has made progress but still isn't a buy
It's encouraging to see Aurora focus more on cleaning up its financials, but it hasn't achieved true profitability yet -- and it's not even close. Positive adjusted EBITDA earnings just aren't all that indicative of the company being on the right path. While free cash flow is a great goal to target, Aurora hasn't reached it yet.
But in the bigger scheme of things, I'm still not convinced that the overall business is going in the right direction. There's a lot of complexity and nuances to consider when targeting many international cannabis markets. That can make it difficult to capitalize on growth opportunities while keeping costs down, given all the red tape and competition the company will have to deal with.
Aurora has made steps in the right direction, but there's still plenty of risk with the stock. Its gains this year mean little for investors who have lost more than 90% over the past three years.
It may be tempting to think that the worst is over for Aurora, but investors may still be better off avoiding the stock. If you're bullish on cannabis, investing in an exchange-traded fund or focusing on multi-state cannabis operators in the U.S. with better growth prospects may be a safer approach in the long run.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.
