3 Strikes Against Aurora Stock and Why You Can Ignore Them

Technical and financial challenges have hurt ACB stock, but longer-term momentum is steadily building

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Despite the dour sentiment in the major indices, marijuana-related investments have flourished. Within this sector, Aurora Cannabis (NYSE:ACB) has roared toward the front thanks in part to the credibility factor. As one of the few names in the industry traded in a “real” exchange, Aurora stock consistently inspires headlines.

That said, those headlines aren’t always positive. After turning in a stellar performance in 2017, the following year didn’t provide many reasons to smile. Shareholders who got caught in the mania phase in the beginning of 2018 suffered a 50% haircut. A surge in ACB stock fell short when global markets capsized starting in October.

The notable consolation is that the company’s rivals haven’t fared well either. Big names, such as Tilray (NASDAQ:TLRY) and Canopy Growth (NYSE:CGC) have produced disappointing results over the past few months.

At the same time, my contrarian mind can’t stop ticking. A year ago, several investors appraised the value of Aurora stock at roughly twice its current price. If it made sense back then, why wouldn’t it make sense now?

After all, the core fundamentals haven’t changed for ACB stock. Instead, a few numbers came in and many decided the risks outweighed the possible reward.

Clearly, ACB and the marijuana sector isn’t for everybody. But while you’re deciding on whether to take a stab, I’ll address three common criticisms:

Aurora Stock Is a Money Pit

Two months ago, my friend and InvestorPlace colleague Will Ashworth shared a common experience: Everybody kept asking us about our thoughts on marijuana stocks. Unlike my convoluted ramblings, Ashworth spared his subjects’ brain cells by going direct. In short, ACB stock will win or lose based on its earnings.

Unfortunately, that’s not great news for ACB shareholders. Pull up the company’s financials and you’ll discover multiple areas for improvement. In particular, operating income continues to slip deep into the red. This is for understandable reasons: in order to meet production and expansion goals, management must spend more green than they smoke.

Take aside non-recurring benefits and you’re left with a potentially ugly earnings picture for Aurora stock. Ashworth rightfully warns readers that speculators must brace for a wild and unpredictable ride.

On the other hand, the marijuana industry represents the growth strategy’s essence. When we look at Amazon (NASDAQ:AMZN) today, most consider it an indispensable component of consumerism. We don’t really spend much time discussing the fact that it took decades for AMZN to turn a substantive profit.

Amazon CEO Jeff Bezos consistently stated that growth is more important than meeting earnings’ targets. Obviously, that doesn’t please the suits on Wall Street. However, Bezos ultimately had the last laugh. In my opinion, we should extend the same respect for Aurora stock.

I’m not suggesting that ACB will be the next Amazon, or even the next Amazon of marijuana. I’m just saying it doesn’t make sense to solely harp on the earnings dilemma when eschewing profitability for growth in a nascent sector that has a proven model for success.

Share Dilution a Negative for ACB Stock

It’s no surprise that cannabis-related businesses have difficulty securing traditional financing. Since most countries have strict laws against marijuana importation, “weedpreneurs” often stand on shaky ground. Moreover, national laws, such as our Schedule I classification, create an ambiguous environment. Understandably, most financiers take a pass.

But the topic will take on more importance in the future. Currently, several major cannabis firms have relatively significant cash holdings. The problem is, they’ll use them up fairly quickly for operating and investment purposes. At some point, sector players will require a fresh cash influx.

The popular workaround is to conduct business transactions through corporate equity. For instance, ACB has previously acquired other companies through its shares. Plus, management has funded projects through issuing shares or convertible notes.

Obviously, such actions have a dilutive effect on ACB stock. Further, if those projects don’t yield expected performance metrics, Aurora will likely suffer exponentially.

Admittedly, this is not a situation that will go away anytime soon. However, it’s very rational to believe that financiers will eventually come around to Aurora stock and its ilk. A prime example is the Congressionally-approved and recently-signed farm bill. This measure effectively recognized marijuana as an economic asset. Undoubtedly, President Trump signed the bill to counteract agricultural losses from the ongoing China trade war.

The move is also significant because it’s an about-face from former Attorney General Jeff Sessions’ draconian, moralized policies. If Trump can soften his stance on weed, I’m sure other powerful people and institutions will eventually follow suit.

ACB Is Too Volatile

I’m going to give it to you straight: Aurora stock is incredibly volatile and will probably remain that way for the next few years. As I said many times about this space, it’s not for the faint of heart.

The bottom can fall out for any reason, including none at all. One major risk factor is that Aurora hasn’t yet secured a big partnership such as the Cronos Group (NASDAQ:CRON) and Altria (NYSE:MO) deal. Mere suspicion could spark a panic in ACB stock.

Properly addressing marijuana’s inherent volatility requires an honest, personal assessment. If you can’t stand or can’t afford losses, I’d steer clear of this industry. However, if you have the safety margin or you’re young enough to absorb the turbulence, ACB stock certainly intrigues.

When you think about it, the marijuana industry will grow old with you. Based on demographic realities, Trump is likely the last POTUS to be born immediately after World War II. If a President who is separated by a half-century from Generation Z can adapt his views on weed, imagine what the future will hold.

In other words, Aurora stock has many challenges. However, the commonly cited problems are mostly nearer-term issues. If ACB can get over the hump, it has massive opportunities waiting in the wings.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2018/12/3-strikes-against-aurora-stock-and-why-you-can-ignore-them/.

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