All eyes have focused on Aurora Cannabis (OTCMKTS:ACBFF) and its peers as legal status for marijuana becomes a reality in Canada on Oct. 17. As one of the larger Canadian producers, Aurora will perform well in its home country and abroad as more countries relax anti-pot laws. I see ACBFF stock as a profitable trade once its U.S. listing becomes a reality. However, beyond this event, investors need to exercise caution.
Aurora reported quarterly results recently, with revenues coming in at C$19.1 million ($14.83 million) — a 223% on a year-over-year basis. This accounts for medical sales alone, so investors should expect a major boost when figures begin to account for recreational sales. The company also enjoyed higher gross margins. This likely occurred due to the rising price of dried cannabis. Cannabis oil also made up a higher percentage of sales.
Aurora also reported a “profit” of C$79.27 million ($61.3 million) for the quarter. However, when one removes the non-cash gains, this still means ACBFF stock continues to see quarterly losses.
Despite its No. 3 status behind Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC), Aurora has become the largest marijuana producer in Canada. It also happens to be the largest cannabis company not listed on a U.S. exchange. However, as mentioned before, that will soon change when ACBFF stock gains regulatory approval for this new listing.
Aurora Holds a Solid Position in Its Industry
Aurora Cannabis stock has also benefited from the company’s moves to acquire other producers. Aurora made 11 acquisitions in fiscal 2018, including buyouts of MedReleaf and CanniMed Therapeutics. It also holds a 17% stake in other firms such as The Green Organic Dutchman (OTCMKTS:TGODF). Aurora has also set its sights beyond Canada as the legalization wave begins to sweep the U.S., Europe and other locales.
Moreover, Aurora Cannabis stock and its peers stand in a unique position. Interest in cannabis has swept the developed world. However, the only country whose legal environment has kept up with market demand so far is Canada. This has led to the heavy demand for Canadian weed stocks.
As more countries legalize, local companies within those countries will emerge and take some of the demand from the Canadian stocks. Despite this, I believe ACBFF stock and other Canadian marijuana equities will enjoy a first mover advantage. If the recent history of Tilray and Canopy offer any indications, listing on a U.S. exchange should enhance this advantage.
ACBFF Stock Could Face Unexpected Issues
That said, ACBFF stock faces some challenges that receive little coverage so far. Stock traders know the adage of, “buy the rumor, sell the news.” By the same token, after pot becomes legal, the market could easily see a “buy the anticipation, sell the event” phenomenon. This could lead to investment interest chilling out after Oct. 17 arrives. Still, Aurora plans to sell its products beyond Canada. Hence, this could lead to “anticipation” shifting to other countries.
Also, despite ACBFF reporting a quarterly “profit” due to some non-cash gains, it remains a money-losing firm from a cash standpoint. As such, Aurora has to raise cash from outside sources until it becomes profitable. Due to its high stock price, stock dilution could become an easy source of cash to keep the company viable. This will place downward pressure on Aurora Cannabis stock.
Moreover, even if ACBFF stock moves higher, it does not appear to compare well to its peers. Aurora trades at over 228 times sales. This compares with CGC stock, which trades at only 39 times sales. Also, Aphria (OTCMKTS:APHQF) trades at 27 times sales and turns a profit. I do not think one can count out Aurora due to its production. Still, I see other weed stocks as safer investments.
Final Thoughts on ACBFF Stock
Although investors will likely profit from ACBFF stock in the near-term, they need to exercise caution. Aurora has become the production leader in the Canadian pot industry. Its acquisitions and moves to sell outside of Canada will also mean the company will remain a force in the industry.
However, the actual realization of legal status could dampen enthusiasm among stock buyers. The continuing losses and the outlandish price-to-sales ratio should also give investors pause. Although I believe in the long-term success in ACBFF stock, investors should look to other equities to profit from the budding cannabis industry.
As of this writing, Will Healy is long APHQF stock. You can follow Will on Twitter at @HealyWriting.