The Aurora Cannabis Company (TSX:ACB)(NASDAQ:ACB) market action following their 2019 year end financials has been downright literary. In a mixed triumph straight out of a Shakespearean tragedy, ACB finally delivering on the functional operational milestones that count went wholly un-noticed by a market intent on punishing them for their ascent to the throne.

For two years, Fundamental Hype has been covering the growth of the cannabis sector and, for two years, we’ve written about how success in the mega-venture environment of cannabis equities was going to be defined by the company that could build the most and best active capacity with the money the market gods were raining on them in a bubble shower.

And for two years, Aurora Cannabis has been steadily and aggressively setting the development pace. Straight-up delivering on the margin and unit volume metrics that define the best builds. Constantly in the mix at a solid second place until last quarter’s virtual tie for first with Canopy Growth Corp. (TSX:WEED)(NYSE:CGC). 

Aurora sold 40% more cannabis than Canopy in Q2

Aurora’s 17,793 kilograms of sales in the June quarter blew Canopy away. It came from a production footprint that is nearing full operation; an especially important contrast to Canopy, who haven’t yet been able to marshal a full grow capacity out of their completed facilities, and are carrying the cost of non-producing rooms. The contrast between Aurora’s efficient tightening of their cultivation ops and Canopy’s fits and starts is apparent when we examine their inventory.

Aurora grows weed that sells

Aurora has never had more work in process inventory than sales revenue. Not since the pre-recreational era have they had more finished goods inventory than sales in the quarter. This is a production profile of a company growing product that the market buys.

Canopy is piling up inventory, telling on themselves

Canopy, by contrast, always has more work in process inventory than their sales. Regular readers know that we’re now going to point out that this inventory profile is consistent with a stack of un-sellable flower, destined for processing and unloading on the coming extracts market. And, as the trash weed that just won’t sell piles up, one has to wonder about the production footprint that Canopy IS running, but this is supposed to be about Aurora.

The end of outsourcing

Quality-wise, Aurora has been the anti-Canopy since they bought MedReleaf. The product consistently produced great reviews, the customers are happy… and the unit sales climbed steadily every quarter. But over two years of covering them, Aurora gave the FH analytics department fits, because the unit sales totals had help.

They didn’t admit it at first, but the quarterly reports following an uncomfortable series of 2017 phone calls with Aurora COO Cam Battley featured a footnote about outsourcing containing a number that enabled analysts to compute the portion of Aurora’s unit sales that were bought on the wholesale market. Re-sold weed couldn’t count as a credit when evaluating cultivators, and we weren’t interested in quarterly production that didn’t sell. Product is only consumer-grade once its sold to a consumer, and the consistent multi-million dollar write downs produced by Canopy’s cultivation infrastructure is the proof.

For two years, there was no getting around the fact that Aurora’s output was supplemented by product they bought on the wholesale market. It wasn’t exactly a high crime or misdemeanor, but it kept us from considering them a top cultivator. In the fourth quarter of 2018, Aurora outsourced 18% of their total production. In Q1, it fell to 13%, and this past quarter…

It was only 65 kilograms out of a total 17,728 kilograms. Not a significant amount.

Now, Aurora supplies the wholesale market. Aurora sold $20 million worth of bulk cannabis in the quarter ending June 2019, accounting for about 20% of their sales. Bulk sales were only $21 million on the year, so this is a new business. It also produced the highest margin at 61% (consumer sales produced a 55% gross margin, medical sales 60%).

Now, in the quarter that Aurora blows past Canopy in unit sales, showing that they can consistently sell what they grow, the grams-produced figure has gained significance.

The company produced nearly 30,000 kilos in the quarter ending in June, which is still a ways off the 625,000 kg of annual capacity they’ve said they’re building, but at this rate of growth, that figure doesn’t seem as outlandish as it once did.

“But what have they done for me lately?“

It isn’t a network sitcom where the protagonist wins, because they did things the right way. The stock market is more about Pyrrhic victories.

This sell off is the Market Gods righteously punishing a $94.6 million quarterly revenue actual that came in below the $100 – $107 million that they had guided for only a month prior. After a brief recovery Friday, Aurora was off -7.6% again today on 16 million shares of volume, closing at $7.26 as the market continued to try to figure out what to do with a clear number one producer, who is going to have to continue to grow into their substantial level of debt.

For their part, ACB isn’t sweating it.

Gunslingers can’t afford to worry too much about being shot.

–Fundamental Hype, following Aurora’s previous quarterly earnings

Aurora lives and dies playing these capital markets, and has every reason to trust its own instinct. Their unloading of their last 28 million shares of The Green Organic Dutchman (TSX:TGOD) IPO stock on the Bank of Montreal in a block trade is the most recent example of ACB’s ability to leverage their relationships, and their talent, in hot-potato execution.

ACB has a $306 million credit facility with BMO, and surely made it known that they’re most inclined to keep their debt with a bank whose trading desk is ready to take on $86 million worth of T(rash)GOD.

TGOD produced 18,000 worth of sales last quarter at a negative gross margin. The pretend cultivator’s Hamilton facility has just been licensed by Health Canada, and Aurora would clearly rather not be around the next time they report. Anyone want to see TGOD’s inventory and revenue profile?

Shout out to TGOD CEO Brian Athaide, whose response to Canada’s best cultivator running away from his company like it had ebola was to highlight the fact that the dissolution of a purchasing agreement would increase TGOD’s revenue share and margin for cannabis that they haven’t yet demonstrated an ability to grow or sell. ALL-TIME spin job.

Aurora’s MO is to count on the fickleness and short memory of the markets working to their advantage, and it’s worked so far. They might be perceived as debt-heavy and bloated for a minute, but that sentiment tends not to last long, because it’s boring. It’s way more fun to see Aurora as a sales leader who has a deal with the UFC and the most *actual* organic cannabis production in Canada, so it stands to reason that the market will see it that way at the first chance it gets. When it does, ACB might bloat up the balance sheet some more while it isn’t looking. Anyone who complains… well…. sounds like the world’s number one cannabis stock doesn’t fit their risk profile. Perhaps they’d be more comfortable in a nice bank stock.