The wide swings in Aurora Cannabis Inc. (NYSE:ACB) this year show bears and bulls are fighting to figure out what ACB stock is worth. And on Oct. 23, Aurora Cannabis gave the stock a boost by listing on the New York Stock Exchange.
The listing does nothing fundamental for the company, but it does add liquidity to its shares. That is why the stock topped over $12 again ahead of the listing: investors priced in the benefits of stock liquidity.
By late-October, a wide-spread selloff, led by the technology sector, cut shares to half the price at below $6. Now wild speculation on Aurora’s fundamentals is driving the stock movements for the time being, sending ACB stock up near-30% over the past week.
Aurora’s Fundamental Strengths
At its current size and growth potential, Aurora could eventually pay a dividend to investors. This could be at least a year away and depends on the company generating cash flow growth from operations. In the fourth quarter, the company reported pro former revenue of over $33.1 million.
This sounds small compared to the over $6 billion market cap but it is a big number compared to the rest of the industry. Aurora owes the revenue size to facility additions. In just a year, it added a fully licensed facility, had two under construction and funded capacity of 180,000 kilograms of cannabis annually.
Aurora also has country diversification: it has a presence in three countries. It has operations and sales in 18 countries in total. Europe is notable because this location will become the company’s biggest distributor of medical cannabis. As management mentioned in its conference call, Aurora has eight facilities licensed for production and five sales licenses. It expects to have 11 facilities and an annually funded capacity of 500,000 kg.
Aurora’s vertical and horizontal integration sets it apart from the competition. With this structure, it maximizes its presence in the industry and throughout the value chain. Astute investors should monitor Aurora’s R&D spend each quarter. If R&D spend increases steadily in the quarters ahead, the company will have a growing range of medicinal cannabis products launched to market.
Currently, Aurora has 40 highly educated staff on the R&D team who specialize in plant science, cannabinoid and terpene research.
Growth Opportunity in Aurora Stock
Aurora will do well in Canada as a potential 250 stores open in Alberta in the first year (with a 37-shop maximum per operator). But the growth opportunity will be international markets. The addressable market of the global medical cannabis market is 10 million kilograms annually. Even though Canada legalized cannabis to kick-off the revenue stream for Aurora, more countries need to legalize it, too, for Aurora to grow at a faster pace.
For now, Aurora will have to address the Canadian market primarily. Ahead of weed legalization in Canada, it loaded up its inventory and biological assets to service this market. Despite the inventory increase, Aurora increased gross margin to 74% in the fourth quarter. The product mix shifted to higher margin cannabis oil products, giving gross margin a lift.
Risks to ACB Stock
Aurora acquired companies and ramped up investment in infrastructure and talent hiring in the fourth quarter of 2018, but it is not stopping there. It set up a new debt facility to lower the overall cost of capital. This will give ACB more flexibility in investment opportunities. The risk is that if demand weakens or if costs grow far faster than sales, the company’s losses could grow.
Bottom Line on Aurora Cannabis Stock
Aurora gets little coverage from analysts, so that could be a good thing. Investors could hold the stock before the market bids the stock price higher. On Tipranks, no analyst covered the stock in the last three months:
Of all the cannabis-based stocks out there, Aurora is a potential buying idea.
The company is benefiting from a growth momentum that followed after the legalization of cannabis in Canada. Now it is up to management to grow sales and to take on more market share to prove its worth to investors.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.