The Cannabis industry has been in turmoil over the last 6 months. Popular Canadian marijuana ETF HMMJ has fallen over 42% since October 2018 highs and there doesn’t seem to be an end in sight. The selloff is more amplified in my opinion due to the fact that many new investors learning how to buy stocks in Canada have purchased cannabis stocks, and as of right now are participating in the sell of due to panic.
Cannabis investors worldwide were anticipating Aurora Cannabis’s (TSX:ACB) fourth quarter results, and the Canadian cannabis company missed the mark by a large margin.
One of the major disappointments on the year was the company’s EBITDA. Aurora had confirmed not long ago that it was on its way to achieving positive EBITDA for the quarter. Guidance was missed extensively, as the company filed a EBITDA loss of nearly $12 million.
Key highlights from Aurora’s fourth quarter
In terms of revenue, it was a strong fourth quarter and fiscal 2019 overall for the company. Aurora has more than doubled its cash on hand and has saw an increase in revenue year over year of 349%. Gross profits came in at $159.8 million, 267% higher than 2018.
Consumer cannabis sales were up 52% compared to Q3 and production volume nearly doubled at just over 29,000 kgs. The company is seeing its margins increase as its cash cost to produce per gram fell 20% when compared to the third quarter.
Average selling price has fallen
Aurora is producing more cannabis, but unfortunately the net selling price for its product is falling. Medical cannabis maintained its selling price at $8.51 and their bulk sales were up 3% at $3.61.
The biggest revenue driver for the company though, its consumer cannabis market, saw net selling price fall from $5.48 in the third quarter to $5.14 to end the year, a decrease of 6%.
With kilograms sold making up only 61% of kilograms produced, it is clear there is an oversupply issue, which has burdened the industry for some time now.
Earnings and revenue both miss analyst expectations
Analysts expected Aurora to post a loss of around $0.05 on the quarter and revenues in the $108.3 million mark. Unfortunately, the company missed on both by a decent sized margin.
With a loss of $0.29 per share, it was a near 600% miss for the company to finish off 2019. Net revenue of $98.9 million missed the mark by almost 10%.
This isn’t the first time a Canadian cannabis company has come up well short of analyst expectations. Canopy Growth missed by a significant margin in its latest quarterly filing.
What does this mean for the industry moving forward?
With valuations as high as they are in the cannabis industry, it is going to need a company to step up to the plate and become a frontrunner. A company can grow its revenue at whatever increments it wants, but the end result of a strong company is profitability, not sales.
Sure, margins are increasing. But as we saw this quarter with Aurora, average cost per unit sold is also decreasing. Slowing growth is financial doom for stocks valued this high.
Edible legalization may provide tailwinds for the industry heading in to the end of 2018, but I wouldn’t bank on it. Investors were already fooled by legalization last October, so don’t trade these Canadian stocks expecting the same thing. They’ve been some of the biggest losers on the TSX in quite some time.