Market Flinches on Missed Analyst Revenue Estimates… Again
A purported Q2 2019 Aurora Cannabis Inc (TSX:ACB) (OTCQB:ACBFF) (FRA:21P) revenue miss sent both its stock—and the sector—tumbling today. But is the move justified? Perhaps the better question is why analysts hold so much sway at this junction of cannabis’ nascent growth stage to begin with. We explore further.
Of course, the sector’s big driver today are mainstream financial media reports that Aurora Cannabis “missed” Q2 2019 revenue expectations by a wide margin. Tier-1 peers Canopy Growth Corp. and Aphria Inc. fell in lockstep with ACB shares—falling as much as ↓3.07% and ↓5.75% respectively—as the miss triggered on-open sell orders. Aurora Cannabis itself dropped as much as ↓4.87%, peak-to-trough, before recovering slightly. As BNN Bloomberg goes on to explain:
“Aurora Cannabis Inc. says it expects to report second-quarter revenue of between $50 million and $55 million. Analysts had expected revenue at the marijuana producer to total about $67 million for the quarter ended Dec. 31, according to Thomson Reuters Eikon.”
While that’s technically correct, these projections are based on a grand total of two estimates. The high projection was $74.77 million for the quarter, while the low one was $60.00 million. With a whopping 24.61% differential between high and low estimates, not even these two analysts could agree to a reasonable consensus.
The same dynamic is shaping up for Aphria, which is scheduled to release 2Q 2019 results on January 11, 2019. According to Yahoo! Finance, the average expected revenue range is $28.48 million. However, high and low estimates vary wildly in range: from $35.63 million on the high end, and $20.65 million below. Given the enormous 72.54% (!) disparity between an already-small sample size of estimates, should any of them really be trusted?
Keep in mind, this comes amidst an analyst forecasting backdrop which has missed wildly to date.
On October 29th, 2018, GMP Securities slashed Canopy Growth FY 2019 revenue estimates by $181 million to $288 million for the period (↓38.59%). GMP’s revised EBITDA swooned to negative $53 million versus previous break-even assumptions. The firm’s brand capture numbers totally missed the mark also, descending to 20% from 33% originally forecast.
GMP Securities isn’t the only one. Last month, Bank of Montreal acknowledged that Q1/19 recreational sales volumes to the province (pink highlight) missed internal forecasts by 316.66% during a Hexo Corp. stock note. While it’s hard to assign blame to a first-pass sales estimate where federal excise stamp issuance was delayed, it nonetheless highlights how unreliable most analysts forecasts have been so far.
Blue: excise tax issue addressed; appears reported sales numbers are legit.
Pink: provincial rec sales WAY above analyst forecasts
Orange: EBITDA loss higher than expected, mainly due to marketing expense
Light Blue: PT revised lower pic.twitter.com/T5PfpVV3J6
— Benjamin A. Smith (@BenjaminA_Smith) December 14, 2018
The point of this article wasn’t to berate or belittle my pseudo peers in the field. Midas Letter happily aired our misguided calls and narratives to end 2018 ourselves. It’s to demonstrate that making investment decisions based predominantly on analyst projections is detrimental to your brokerage statement if taken too seriously. The industry is too early-stage for reliable projections to present themselves. Some of that has to do with missing variables; in Aurora’s case, the lack of estimate inputs.
Obviously, things will change over time as datasets become more stable and constant. Precision will increase until it becomes exacting and scientific. Until then, looking at the market from a quantitative lens alone is a good way to lose your investment capital.
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