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The big day is finally here. It is nowadays that the sale of marijuana for recreational purposes is legalized throughout Canada, making it the first industrialized country in the world and the second most in all after Uruguay to give fire Cannabis green for adult use.
Although this is a long-awaited day for the legal weed industry, it may be an even tougher day for investors in marijuana stocks. You see, since the beginning of 2016, we have seen an increase of more than 1,000% of pot stocks. Now is the time for these companies to recover or keep quiet, so to speak. In other words, the time of promises is over and investors are eagerly awaiting the tangible results of sales and profits.
One of those marijuana stocks that I've been very skeptical of in recent quarters is Aurora Cannabis (NASDAQOTH: ACBFF). Although it is the third largest stock of pot by market capitalization – and it becomes the leader in total annual production – Aurora has a lot to prove to maintain or strengthen its valuation. But if Aurora Cannabis can master these five keys to success, it could prove the opposite.
Source of the image: Getty Images.
1. Increase capacity on time and within budget
Aurora Cannabis has been taxed as the group of bullish investors, and they are all laser focused on the company's record production potential, namely 570,000 kilograms, according to the company. Note that this maximum estimate does not include the current acquisition of ICC Laboratories for a little over $ 220 million, which should easily allow Aurora to exceed 600,000 kilograms a year at full capacity.
But investors need to understand that Aurora is still a long way to hit this peak production capacity. Its latest quarterly report indicates that it operated at a rate of 45,000 kilograms per year starting in September, with a forecast of 100,000 kilograms of annual flow at the end of the calendar year. When its fiscal year ends at the end of June 2019, it will still produce only 150,000 kilograms per year.
By the end of 2020, for example, Wall Street and investors will seek to keep Aurora within its budget and main facilities. This includes the modernization of greenhouses abroad as part of its joint venture with Alfred Pedersen & Son (Aurora Nordic); its 1.2 million square foot organic build in Medicine Hat, Alberta, known as the Aurora Sun; and the ongoing expansion of approximately 1.1 million square feet owned by ICC Labs.
Source of the image: Getty Images.
2. A growing international presence
One of the most overlooked aspects of Canada's legalization is that the domestic market is not worth nearly as much as the international markets in the long run. In a report published by Health Canada, annual domestic demand stood at about 1 million kilograms, while a handful of provincial reports predicted more than 800,000 kilograms. However, the maximum production of all producers should easily exceed 3 million kilograms. This surplus will be for foreign countries where marijuana for medical purposes is legal.
By the end of its 2018 fiscal year, Aurora Cannabis was present in 18 countries and five continents. But, again, we are talking about relatively new operations with the green flag officially being signed in Canada today (October 17). What skeptics, like me, will want to see, is that Aurora focuses specifically on these foreign markets, which will likely make up more than half of its annual sales.
The company 's Aurora Nordic project will make a decisive contribution to facilitating this presence abroad by providing at least 120,000 kilograms of cannabis for medical purposes in the Scandinavian region of Europe. Aurora will really focus on its international expansion strategy over the next two quarters.
Source of the image: Getty Images.
3. A focus on product differentiation
It is not necessary to classify these factors of success, but if it is a number two or most important priority for the company, it will differentiate its products. from the rest of his peers. That's because the success of this industry is not just about growing marijuana.
Aurora may be the backbone of growth potential, but it still has a lot of catching up to do, for example, Canopy Growth Corp., which has what is arguably the most recognized weed brand in the country in its portfolio (Tweed). Canopy's sales channels and branding strategy make it a formidable opponent in the world of cannabis.
The way Aurora can differentiate itself is twofold. First, it will have to devote time, effort and capital to building its brands. And secondly, it will have to expand its product line well beyond dried flowers, which have been shown to be subject to progressive commoditization in some US states where weed for adult use is legal. The Aurora campaign in cannabis oils and other alternative products, such as infused beverages, will be crucial to increase its margins and make sure that every dollar of business really counts.
A word: with the exception of oils, alternatives, including beverages, vaps, concentrates and infused foods, are not yet legal. Parliament should examine and expand consumer options in 2019.
Source of the image: Getty Images.
4. A brand partnership
Then, Aurora Cannabis will most likely want to create a partnership or investment with a brand company to validate its position as a leading pot company. After all, with more than 600,000 kilograms of annual production at its disposal, it makes sense for a beverage, tobacco or branded drug company to partner with Aurora.
Last month, Coca Cola (NYSE: KO) According to BNN Bloomberg, there were waves when it was announced that he was in discussion with Aurora Cannabis. Aurora and Coca-Cola have both expressed interest in the potential of cannabidiol (CBD) beverages. CBD is the non-psychoactive cannabinoid better known for its medical benefits. The deep pockets, international presence and branding of Coca-Cola, coupled with Aurora's production potential and his extensive knowledge of the marijuana industry, could be a perfect fit .
Of course, Coca-Cola had discussions with a cannabis company before it came anywhere, so it would be imprudent to count your chickens before they hatched.
Source of the image: Getty Images.
5. The ability to overcome dilution in shares
Finally, but this may be the most daunting task of all, Aurora will have to overcome years of widespread stock-based dilution and provoked by numerous purchase offers.
Before the adoption of the Cannabis Act on June 19, marijuana stocks had only one means to quickly and efficiently mobilize a lot of capital: bids for purchase. A firm purchase offer involves the sale of common shares, convertible debentures, stock options and / or warrants to a single investor or group of investors. 39; investors. Although these capital increases have always achieved their objective, they have also significantly increased the number of outstanding shares of the companies that participated.
Following the last purchase of Aurora and considering its convertible bonds in bonds, options and outstanding warrants, it could easily have more than one billion shares outstanding by now the end of fiscal 2019 in June. However, it had only 16.2 million shares outstanding at the end of fiscal 2014. These added shares dilute the value of existing shareholders and make it even more difficult to obtain shares. a significant profit per share. For Aurora to really succeed and prove otherwise, it will need to generate significant earnings per share every quarter and reduce its P / E ratio to three digits.
That's the formula of success – let's see now if Aurora Cannabis can run it.
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