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Why Aurora Cannabis Stock Will Drop Back Under $5

It’s been an exciting couple of weeks for the marijuana industry in general and Aurora Cannabis (NYSE:ACB) in particular. This week, Aurora announced a new acquisition in Mexico that sent ACB stock significantly higher.

More generally, a huge strategic investment got speculators excited about marijuana stocks again after the recent decline. Altria (NYSE:MO) elected to pay $1.8 billion to buy almost half of Cronos (NASDAQ:CRON). That marks the second major outside company to splash billions in the marijuana space. Remember that Constellation (NYSE:STZ) started the party earlier this year with a huge purchase of Canopy Growth (NYSE:CGC).

Will Aurora be next?… Probably not. Here are reasons to rein in your enthusiasm a bit for ACB stock.

Mexico Acquisition

Aurora CEO Terry Booth in a recent interview with BNN stated that: “This Mexican deal really excites us. There’s 130 million people in Mexico. It’s an exclusive contract as it sits right now to supply THC for the very first time […] now that we’re able to bring our medical derivatives into the Mexican medical cannabis market, like I said, it’s the largest opportunity in any single country that’s been in the space to date.”

However, I can say as someone who lived in Mexico almost three years that I’m skeptical this partnership will amount to much. For one, the pharmacy company they purchased, Farmacias Magistrales has only existed seven years and has a rather underwhelming website as of this writing. This seems like a very new operation, and as such, shouldn’t be expected to contribute much to Aurora’s results anytime soon.

Additionally, while you can point to the 130 million person market as a large opportunity, I see several issues. For one, average incomes in Mexico are around $15,000/year. That leaves far less discretionary spending available than in the U.S. or Canada. There are also cultural issues. The country remains highly religious, for example. That, combined with the devastating effects of the drug war, have left a much harsher stigma against drug use than you find in North America.

To be fair, Aurora is positioning this as a pure-play medical market for now. Mr. Booth specifically said they aren’t targeting the recreational market at this time. And with enough time, this could turn out to be a home run deal for Aurora. But there is a ton to prove first; I wouldn’t buy ACB stock today on hopes from the Mexico play.

Too Many Acquisitions?

The BNN host wisely brought up the fracas that has occurred with rival Canadian marijuana company Aphria (NYSE:APHA). William White covered the Aphria story last week here at Investorplace.

To give a brief summary, a hedge fund called the company a “black hole”. It, along with a research firm, put out a report alleging that Aphria has misled investors about its assets in Argentina and Jamaica. While Aphria claims to have promising outlooks in those countries, the short sellers’ report left readers with a different takeaway. Aphria stock has lost more than half its value over the past month.

In the interview, Aurora’s CEO declined to comment about Aphria. Booth did say that Aurora has done all the necessary research on its acquisitions and isn’t concerned about the possibility of problems with its purchases.

That said, investors should keep a close eye on Aurora. Booth noted that Aurora has acquired more than 40 companies to date. That’s a tremendous amount of buying activity. Potentially, short sellers could dig into all these different purchases and try to find something shady. It also strains credibility to think Aurora will be able to make all these acquisitions and partnerships work out. The company already has things underway in 24 countries across five continents.

I get trying to be the first move, but they may be spreading themselves too thin. Additionally, Aurora’s share count has positively exploded from 200 million shares two years ago to almost a billion shares outstanding today. That is a terrifying level of dilution.

ACB Stock’s Best Hope Is A Strategic Partner

Given Aurora’s soaring share count and lack of strong financials, a buyout could be the best hope for ACB stock owners. In the BNN interview, the host reminded listeners that there were rumors that Coca-Cola (NYSE:KO) was set to invest in Aurora earlier this year. Discussing the matter, CEO Booth said that he couldn’t comment on the matter.

In a separate interview with Cheddar TV, Booth said directly that “Aurora is not for sale […] it’s too early in the game, in my opinion, to be locking up with some of those [big food and drink] players.”

Of course, that doesn’t necessarily mean there won’t be some sort of deal. There’s a big difference between a company like Coke making an equity investment in a firm and buying it up entirely. I will say, in its favor, that ACB stock comes with a healthy cashed up balance sheet and few immediate liabilities, so the company has time to pursue its globe-hopping growth strategy before needing an outside infusion of funds.

That said, the valuation for ACB stock raises plenty of doubts here. With a market cap of nearly $6 billion, investors are betting that this company will deliver huge profits one day. Unfortunately, the company earned just $60 million in revenues over the past twelve months. Against that, it managed to lose $133 million. This means Aurora lost more than two dollars per dollar of revenues it generated. Right now, costs are surging faster than revenues, as you might expect with its operations in so many countries. ACB stock may eventually become a buy, but at this point, speculators can really only hope for a strategic partner to lift the share price. Otherwise, ACB stock will go back under $5.

At the time of this writing, Ian Bezek owned CRON stock. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media,

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