So far, 2020 has not proven to be a bounce back year for the cannabis industry and this is a market that we are highly focused on. One of the major headwinds for the cannabis sector is related to the rollout of cannabis 2.0 products in Canada. Another major headwind is related to the lack of growth that is associated with emerging international cannabis markets.
The market has punished the cannabis sector, and this is a trend that dates back to early 2019. Although the recent trend is concerning, we believe that the cannabis sector is comprised of companies that are actually executing on previously announced initiatives and that have been reporting strong growth.
Last week, two high-profile Canadian cannabis producer reported quarterly financial results and the market responded favorably to these reports. Although one of the companies significantly missed expectations and reported a massive net loss, the market was prepared for this and responded positively to the report. This is a lot different from the other company that we are going to highlight which reported better than expected numbers and we believe that the cannabis sector is reaching an inflection point.
The Canadian cannabis producers that we are going to highlight in this article are Canopy Growth Corporation (WEED.TO) (CGC) and Aurora Cannabis Inc. (ACB.TO) (ACB). These are two of the best know public cannabis companies and we believe that our readers need to be aware of the opportunities.
Canopy Growth Reports Better-than-Expected Numbers
Canopy Growth Corporation released quarterly financial results the day after Aurora Cannabis and reported numbers that came in above expectations. During the third quarter, the company generated more than $130 million of revenue and this represents strong growth when compared to the prior quarter.
At the end of the quarter, the Canadian cannabis producer reported to have more than $2 billion of cash on the balance sheet and this leaves the company well positioned to capitalize on organic and inorganic growth opportunities. Over the next year, we expect to see Canopy Growth report strong revenue growth from international cannabis market and expect this to be a major value driver over the long-term.
When it comes to the Canadian recreational cannabis market, Canopy Growth has been highly focused on further penetrating this market and we are impressed with the success that the business has had so far. Going forward, we expect to see the company be a major beneficiary of changing landscape of the Canadian cannabis market. Canopy Growth has attractive leverage to high-growth verticals within this market and we expect this be an area of growth for the business.
When compared to Aurora Cannabis, Canopy Growth has been nothing short of an execution story and has been able to keep the business together. We believe that Canopy is a few steps ahead of Aurora as it relates to the management team, the international opportunity, and the balance sheet. We will be closely monitoring these operators on a going forward basis and will monitor how the stories evolve from here.
Aurora Cannabis is Working to Turn the Ship Around
Last week, Aurora Cannabis (ACB.TO) (ACB) reported a massive net loss for the second quarter (which is the period that ended on December 31, 2019) and the market responded favorably to these numbers. Although we were surprised by the market’s response, Aurora Cannabis was under massive pressure prior to this report and we believe that the lack of success was already priced into the stock.
Following the weak earnings report by Aurora Cannabis, the stock was further downgraded by leading Canadian broker-dealers. Canaccord Genuity lowered its price target to $2.25 (CAD) from $3.00 (CAD), while CBIC lowered its price target change to $2.25 (CAD) from $2.50 (CAD). This comes less than 2 weeks after Aurora Cannabis was downgraded by several broker-dealers and this a trend that caught our attention.
During the second quarter, Aurora Cannabis reported to have generated $66.6 million of consolidated revenues. This was considerably lower than the $75 million of revenue that was reported in the prior quarter. The decrease was primarily related to lower medical cannabis sales in Germany and this is a trend that is not expected to continue.
Some important metrics that our readers need to be aware of are released to the average sale price, gross margins, and production levels. When compared to the prior quarter, the average sales price declined, margins declined, and overall production declined. These are statistics that don’t sit well with the market and we are not surprised by the recent pressure.
Going forward, the market seems to be concerned with the strength of Aurora Cannabis’ balance sheet as well as the management team. During the last quarter, several key players of the Aurora Cannabis team have left the operation and we will monitor how the company is able to fill these voids and execute from here.