Most Canadian cannabis stocks are seemingly expensive today. After all, virtually none are profitable, and most have quarterly revenue under 100 million Canadian dollars. Yet some of these companies have seen their stocks bid up into the multibillions in market capitalization. In fact, Canadian leader Aurora Cannabis (NYSE:ACB) is currently valued at roughly $8 billion, despite making only about CA$75 million in revenue in its most recent quarter.
Of course, the market isn’t just looking at today, but ahead to the future. Investment bank Cowen (NASDAQ: COWN) thinks worldwide cannabis sales will hit $75 billion by 2030, while Bank of America (NYSE: BAC) thinks the market could eventually more than double that figure, to $166 billion.
Aurora is gunning to become the largest producer in the world and capture as much of this huge future market as possible. Here’s Aurora’s big vision looking a few years out…
Scale matters in commodities
Aurora leads all other cannabis companies in terms of potential kilograms produced. In the most recent quarter, Aurora produced 15,590 kilograms, which annualizes to roughly 62,000 kilograms.
But these numbers don’t really tell the whole story. The first quarter also saw an inflection in the company’s growing capabilities, with production surging nearly 100% quarter over quarter, not year over year. When current and funded capacity comes online, Aurora will be capable of producing over 625,000 kilos of cannabis annually — roughly 10 times the current production run rate. That leads second-place Canopy Growth (NYSE:CGC)by roughly 100,000 kilos.
The amount of cannabis produced is not merely for the sake of size alone. Aurora is betting its massive scale will drive down costs per gram over time. That’s a big deal, since many believe that cannabis will become relatively commoditized, and the lowest-cost producer usually has a competitive advantage in a commoditized market.
While Aurora has also expanded aggressively internationally to 24 countries, it will also export a fair amount from its massive facilities in Canada. That should give Aurora a cost advantage relative to, say, its U.S. competitors, which must have several facilities across different states, because of federal U.S. laws.
On the recent conference call with analysts, management said U.S. growers “have multiple state operators, multistate operators that have small facilities in their various states” and added, “[t]hat’s not really the Aurora way of doing things.”
Massive, custom facilities make the difference
Management also pointed to the long-term advantage of Aurora’s custom-built cannabis grow facilities. These differentiate Aurora from its competitors, which essentially use retrofitted greenhouses. Aurora has thus been able to better control its internal environment and has never had a crop loss.
That’s led to industry-leading efficiency. In the March-ended quarter, Aurora drove its costs per gram down from CA$1.92 to just CA$1.42. Again, this change was all in the span of just one quarter. While the company’s average selling price also fell, it did so only mildly, from CA$6.80 to CA$6.40 per gram. Overall, the company’s gross margin expanded from 54% to 55%.
Aurora’s management believes it can drive down costs to “well below CA$1 per gram,” as its main Aurora Sky facility ramps up production this year. That would probably be the most efficient growth in the industry and could further buoy margins.
If one factors in all of Aurora’s capacity and uses a CA$6 per gram average selling price, Aurora could reach CA$3.75 billion in revenue within a few years, and if the costs per gram continue to drop, the 55% gross margin from the past quarter could potentially expand north of 60%…
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