Aurora Cannabis Earnings: Steady End to Shortened Fiscal 2023, but Extreme Uncertainty Remains

Not much of our long-term outlook for Aurora Cannabis ACB is likely to change based on our initial reaction to fiscal third-quarter results, the end to a shortened fiscal 2023 as the no-moat company shifts its year-end date. We will update our model after more-complete financials are released, but we expect to reduce our $3/CAD 4 fair value estimate by a high-single-digit to low-double-digit percentage, in line with the shares’ 8% drop in reaction to the results. Our cut is mostly due to further dilution of shareholders, with around 13 million shares being issued during and subsequent to the quarter well below our fair value estimate.

The shares trade well below our fair value estimate, but we reiterate our Extreme Morningstar Uncertainty Rating amid the threat of material value destruction. We see better risk-adjusted upside in U.S. multistate operator stocks because of their exposure to more-favorable legal U.S. markets as well as lower risk of value destruction.

Financial results for the quarter were mediocre. Sequential revenue growth of 4% to CAD 64 million was decent. Adjusted EBITDA remained barely profitable at just CAD 310,000, though this is still the second consecutive and overall quarter of positive earnings. Digging deeper into the results, cannabis continues to struggle, with growth in noncannabis plant sales offsetting lower cannabis revenue. Selling, general, and administrative expenses of CAD 28 million remained within the company’s CAD 30 million target after excluding restructuring and other one-time expenses. Still, even that target would represent nearly half of quarterly sales. Overhead will continue to be a barrier to meaningful profitability until Aurora reaches top-line scale.