For marijuana investors Aurora Cannabis (NYSE:ACB) has a lot going for it. Aurora stock has that New York Stock Exchange listing, which was launched on Oct, 23. It has enormous growing capacity — over 150,000 kilograms or roughly 180 tons.
Best of all, it’s making a little money. On Nov. 13 the company reported earnings of 1 whole Canadian cent per share, after forecasting a loss, on revenue of about $22.4 million, or CAD 29.67 million. (The Canadian dollar is worth about 76 cents.)
All this had bulls singing Aurora’s praises. The response of the stock was to drop 2%.
What’s going on? Pot stocks were always a fad, like bitcoin last year, and with people worried more about keeping their money than getting more, pot stocks are being roundly dropped.
The Aurora Stock Story
To the bulls, this is just the start. Canada began legal pot sales in October, with plans to expand that into edibles and vaping. Aurora has 30% of sales through government-run stores in Ontario, selling its product at about $4 per gram, or $116 per ounce.
To hear Aurora management tell it, they’ve got the good stuff, can barely keep it on shelves, and they’re ramping up as fast as they can. Aurora claimed gross margins of 70%.
The company’s slide deck shows it tripling capacity, to 500,000 kilograms, at 11 facilities, with distribution in nine other countries besides Canada, and plans to build “a global leader with expertise across the entire cannabis value chain.”
The company did a great job of preparing for its NYSE debut, say the bulls. It cleaned up the balance sheet, jumped in just as Canada made pot legal, got its licenses and even sold out some production to raise cash.
Wait a Minute
Accept that optimism at face value.
Assume sales of $100 million over the current fiscal year with growing acceptance in Canada and no reduction in market share to a host of competitors. You’re still paying over 60 times revenue with a market cap of $6.3 billion. The company has 960 million shares outstanding.
Competition is certain to grow. As Andrew Left of Citron Research, who studies stocks with an eye toward short-selling, has noted, scaled U.S. companies have yet to be heard from and there are no brands to speak of. His view is this will blow up like the old Canadian penny stocks did.
The bigger problem with Aurora stock, and all the Canadian pot stocks, is that we’re now in a bear market. In a bear market, investors turn from greed to fear. Capital preservation becomes the thing. Growth is shunned in favor of value.
That makes this a bad time to be selling growth. With stocks like Amazon.Com (NASDAQ:AMZN) down 7.4% for the month, more speculative names like Aurora are certain to collapse, and Aurora stock is down 10% since its NYSE debut despite those “stellar” earnings.
The Bottom Line on ACB
It’s too early in the development of the marijuana market to call any stock an “investment.”
They’re all speculations. When Constellation Brands (NYSE:STZ) put $3.8 billion into Canopy Growth (NASDAQ:CGC) in August, it was speculating. Since then the shares have risen into October and are now falling. Those of Aurora have done slightly better than Canopy’s, which is why analysts are pounding the table for it.
No one knows, at this point, how big the Canadian pot market will be, whether Canadian growers will be able to handle U.S. competition, or whether this will more resemble tobacco, as Aurora seems to believe, or a pharmaceutical, as Canopy claims.
We just don’t know.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
