Why Aurora Cannabis (ACB) Will Perform Well Against Low-Cost Latin Competitors

Some investors have been raising concerns over the potential disruption of the cannabis market in general with low-cost pot produced in Latin America flooding the market, and in some cases, specifically with Aurora Cannabis (ACB) because of its market-leading production capacity, which could be undermined if it has no answer to the challenge of the industry being forced to compete on price alone, making marijuana nothing more than a commodity.

Looking at it short and long term

With the cannabis market where it stands today, there is nothing to be concerned about with low-cost pot competing with Canadian or U.S. producers, or Aurora Cannabis in particular.

At this time there is very little trade going on between Canadian cannabis companies and foreign businesses, and in the U.S., it's illegal for cannabis to be imported. Neither of those are likely to change in the near future.

Overall, the Latin America producers are focusing primarily on the Latin American and European markets, looking to, for the most part, to compete in the medical-grade cannabis oils segment of the market.

Eventually that will without a doubt change as production capacity ramps up, and there will eventually be massive exports from Latin America to the North American markets.

The good news there for Aurora Cannabis is it's one of the big players in Latin America via its acquisition of ICC Labs.

ICC Labs

With the acquisition of ICC Labs, Aurora gained 70 percent market share in the market of Uruguay, which was the first country in the world to legalize recreational pot, and as important, its medical license in Columbia, where it can produce medical cannabis.

Columbia is especially important because that's the country many investors are concerned about in regard to low-cost cannabis.

As for the production capacity that comes with ICC Labs, when all its facilities are completed, it will be able to produce about 450,000 kilograms a year, or slightly under 1 million pounds. It is also thought it may be able to exceed that if market demand exceeds expectations.

So when thinking in terms of Columbia or Latin America disrupting Aurora Cannabis, it has to be understood that the company is a disruptor, not the potentially disrupted.

All that said, it's not probable that the main purpose of boosting capacity in Latin America is for the primary purpose of selling low-cost, low-margin pot. It may do so for a time in order to put downward pressure on competitors' margins and earnings, but I don't think it's going to sacrifice its own margins and earnings in the long term. There are a lot more profitable ways to use its product.

Higher-priced products

For some time Aurora Cannabis has clearly stated it considers itself a medical cannabis company. That doesn't mean it won't sell recreational pot, because it is and will continue to. It does mean that over time, it will gradually reduce recreational pot as a percentage of sales, or increase medical and wellness sales to the point they become a much higher percentage of its revenue. Either way, recreational pot will eventually become less important to the company.

This is another reason why low-cost pot imports won't be a threat to its performance, beyond being one of the sources of the pot.

For a time Aurora will need the revenue from recreational pot as it grows out its hemp, CBD and medical pot businesses, but once they take off, it'll focus on those higher priced products, rather than the commodity that recreational pot will become. There will be some branded exceptions on the recreational side, but as a whole, it will become a low-price commodity in the years ahead.

This is why when you look at the various companies Aurora has acquired, they almost all focus on specialized products and cannabis strains that will generate wider margins and better earnings, even as demand for them continue to soar.

Conclusion

With its low and high priced cannabis, it provides Aurora with a lot of flexibility to respond to changing market conditions.

As it starts generating a lot more revenue over the next several quarters from its rapidly increasing production capacity, it will start to earning back the investment it put into its many growing facilities, making it likely the company will draw from some of its lower cost product from Latin America in order to boost margins and earnings even more.