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Source: Looking for alpha
Aurora Cannabis (ACB) has many elements in its business, making it sometimes a difficult business to analyze because it sometimes obscures the macro of the business with so many microelements.
But investors only need to look at three major aspects of Aurora Cannabis to understand the company's extraordinary growth potential. These are recreational pot, CBD and medical cannabis.
In this article, we will examine these three macroeconomic elements of the business and why, when combined, they represent both income and long-term revenue potential.
Recreational pot
The most important thing associated with the recreational pot is probably that its legalization in some countries and states has propelled cannabis in general into the public consciousness.
This of course represents a tremendous revenue opportunity for Aurora Cannabis and other companies, especially over the next two years, as it is the revenue base for businesses to operate while working on other sources of revenue. more profitable and predictable.
In the case of Aurora, he does better than many of his peers because he divides about 50% of the income from the medical and recreational pan. In contrast, about 75% of its revenue comes from recreational marijuana.
This is important because the recreational pot does not generate significant margins, which weakens revenue.
In the last quarter, revenue from Aurora's recreational pan has increased to just over 50% of its overall sales.
I'm not saying that it's negative, but only that the leisure pot is considered an intermediate source of income that, over time, will decrease as a part of the overall income, while sales of CBD and Medical cannabis becomes a larger percentage of those of Aurora. top line. Ultimately, this will widen margins and generate higher profits.
Even if more countries legalize the recreational pot, it will not change. With its market-leading cannabis production, Aurora wants to allocate resources to the most profitable products, which means that it will favor applications of CBD and medical cannabis on recreational applications once the choice is made. The choice will be triggered when the demand for recreation in Canada is met.
In most cases, all cannabis companies are exposed to the hobby pot, including the United States. They are likely to fail in the long run.
I am not suggesting that investors sell these shares for the moment, but only that there will be no other place to go once the recreational pot companies have fully sourced this market. This is the reason why most small pot companies lacking the resources to develop their HBD and medical pot business are not going to survive. Aurora is not one of them.
CBD cases
The CBD market segment is probably the most popular part of the cannabis industry at the moment. Much of this is associated with the potential of the US market.
There is a lot of potential here, but there are some limitations in the US that need to be addressed to manage expectations. For example, it is still illegal "to introduce foods containing CBD … in interstate commerce, or to market CBD-based products … as or in food supplements, whether these substances are or are not derived from hemp. "
Former FDA Commissioner Scott Gottlieb made this statement on the day of the promulgation of the 2018 Farm Bill.
Part of the problem lies in the CBD approved by the FDA as a drug before it begins to be marketed as a dietary supplement. Both can not be marketed as a supplement and a drug at the same time. This is why interstate commerce is illegal. That's why companies such as Cronos focus on marketing and selling vape cartridges, sprays, dyes and creams based on CBD. Aurora management has said in the past that the CBD market in the United States is far from clear, and they are in no hurry to aggressively pursue it at this time.
The FDA has made it clear that it will take some time before making a final decision on the guidelines that companies that market the CBD can use as parameters for doing business in the United States.
For this reason, the optimistic outlook for CBD sales in the United States will have to be lowered in the short term.
When the smoke disappears with the CBD, it will be a large global market. I think the best way to think about CBD in general is to think of it as very similar to the current supplement market.
Medical cannabis
The management of Aurora Cannabis considers the medical cannabis market as its main business and I agree that it has by far the highest potential of the other segments, even though it enjoys the lowest coverage media.
Another element to take into account is that some people confuse the CBD used for well-being with the CBD used for medical treatments, while it should be separated. The welfare market is very different from the medical cannabis market and should be treated as such when analyzing the company.
I think the main reason is the emphasis on preventive medicine by a growing number of people, where supplements are considered an important part of maintaining good health, and the treatment of symptoms after the discovery of a condition pathological, which is considered a traditional medicine. Many people and doctors see them as two sides of the same coin.
Although this may be true to a certain extent, as far as Aurora Cannabis is concerned, both must be separated. It is one thing for people to buy a supplement, it is another to buy a treatment that treats the symptoms of an illness or condition. The reality is that the latter is much more profitable than the first.
Some of the most obvious examples include FDA-approved GW Pharmaceuticals and Epidiolex for the treatment of seizures in people with Lennox-Gastaut syndrome or Dravet syndrome. It will be an important and long-term catalyst for the company's revenues and profits.
I think when Aurora Cannabis's management talks about medical cannabis, it does not refer to CBD-based products, it looks for ways to treat existing conditions that get approval from regulatory agencies. That's where the real money is and very few people talk about it. This is also why he recently joined the UFC to undertake advanced research on the CBD.
Finding solutions in the sports medicine market would be a major step forward and a significant source of revenue. This is only one of the many possibilities available. There is also the treatment of PTSD, ALS, chronic pain, Crohn's disease, multiple sclerosis, nausea and vomiting associated with cancer treatments, among others.
While these can now be treated with cannabis, companies that are researching and finding more effective ways of addressing these conditions – through the approval process such as that of GW Pharmaceuticals – will gain a competitive advantage. considerable compared to their peers.
Conclusion
As these three segments of the cannabis industry continue to grow, Aurora Cannabis is uniquely positioned to grow with them. This unique position lies in the fact that it separates itself quickly from all competitors on the production side.
Not only does it need a lot of cannabis to serve the markets for recreational cannabis, CBD welfare and medical cannabis, but it is also necessary to have a variety of strains and sufficient quantities to make search and book for other needs.
Some have wondered about the opportunity to develop production capacity so quickly, but in my opinion Aurora Cannabis has taken the appropriate steps to prepare for the extraordinary growth opportunities that it offers.
As regulation in the United States and other countries clears and Aurora understands the industry's parameters in various markets, it will be able to take advantage of its market-leading cannabis offering. in many vertical markets.
And as good as it sounds, it is still in its infancy in building partnerships with companies in various sectors, representing various products. This was a point of contention between analysts and experts, who were looking for Aurora to enter into an agreement with a giant firm in a sector. She has differentiated herself by looking for numerous partnerships that allow her to maintain control of the company; something that I find very beneficial as a shareholder.
Aurora Cannabis needs to understand that the market will continue to be competitive in the segments of the cannabis market mentioned in this article, the recreational pot being the main source of short-term income, the well-being of the CBD and medical sales becoming more important. in more important. percentage of revenue.
As the demand for recreation in Canada is not fully satisfied at the present time, the company is likely to experience a percentage of recreational pot sales growing for a quarter or two, but there is no doubt that the cannabis for medical purposes will be the main catalyst for growth.
When combined, the story of Aurora's growth seems huge. It is simply a question of matching the supply of cannabis, of making the regulatory environment more flexible and clearer, and of carrying out research that provides legitimate solutions to various symptoms of diseases that have effects. limited secondary Once this happens, the company's performance will positively surprise even its worst critics.
Disclosure: I am / we are long ACB. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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