Aurora Cannabis (NYSE:ACB) is having a busy year raising its cash on hand. It filed a $750 million mixed shelf offering at the start of the month. In mid-January, it filed a $250 million aggregate principal amount of convertible senior notes due 2024. What is the company doing with all this money? And if markets continued to accumulate shares throughout the year, will the stock reward loyal holders?
Higher Debt and Share Dilution
The convertible notes issuance and mixed shelf offering will no doubt give Aurora plenty of cash to grow the business. But the cost to existing shareholders is more debt and share dilution. Now, this could still pay off for Aurora and its shareholders if the company puts the cash to good use.
Also, its competitors either raised cash on the stock market or sold part of the company in return for a cash infusion. For example, Tilray (NASDAQ:TLRY) raised $435 million in October, while Canopy Growth (NYSE:CGC) got an investment from Constellation Brands (NYSE:STZ).
Executive Chairman Michael Singer said:
“Although we have no immediate intention of drawing capital against this Shelf Prospectus, we have introduced this option as a prudent and long-term strategic measure to provide us with flexibility in access to growth capital, if or when required, to continue executing on our global expansion and partnering strategy.”
Dilution Could Pay Off for ACB Stock
Aurora is not diluting investors if the company signs deals that add value to the business. So far, Aurora bought companies but paid fair value for them.
Last year in May 2018, it bought MedReleaf for CAD$3.2 billion in an all-share transaction. Or it expanded its facilities through higher capital expenses. More recently, on Apr. 10, Aurora expanded the size of its marijuana production facility in Medicine Hat, Alberta, by 33%.
The acquisitions and production facility investments increase the company’s scale. This, in turn, increases Aurora’s growth potential. So as markets willingly bid cannabis stock higher, the high valuation in ACB stock works in the company’s favor.
It may use its own stock to scale up its business. This will allow it to catch up to Canopy. However, it needs to keep showing results. Previously, Tilray enjoyed a higher valuation but weak quarterly results posted in March sent the stock on a downtrend. TLRY stock is down 30% in the last month.
Cannabis companies are racing to beef up their size, scale and growth rates. Only a few of them will reach a big enough scale to become global leaders in the industry. So, that small debt offering could allow Aurora to leverage its balance sheet to go after growth.
A word of warning: short-term risks are high for investors here. Aurora and other cannabis companies are not making any profits yet, and revenue growth trails mounting costs, so always proceed with caution.
Opportunities for Aurora Cannabis
Aurora leads in medical market share in Europe and Latin America. It is active in 5 continents and 24 countries. On top of the 15 strategic acquisitions made since Aug. 2016, it completed or is undergoing 40 clinical studies. The studies involve over 71,000 medical patients.
Production capacity is currently 100,000 kg per year (as at the end of Q2/2019). By early 2019, it forecasts production of 150,000 kg/year and then over 500,000 kg/year by mid-2020.
The cash raised could accelerate Aurora’s lead in the Canadian market. Quarterly revenue is growing nearly exponentially, while competitors trail by a wide margin. As long as registered medical patients grow and production increases, expect the pace of revenue growth to continue.
Aurora’s addressable market may expand as it targets the Canadian medical, global medical, Canadian adult-use, and global adult-use markets. So far, margins are stable for the Canadian markets and in the case of adult use, strengthened through premium and innovative products. Globally, Aurora needs to leverage its early mover advantage, spend on R&D to develop high margin products.
Aurora has tremendous global market growth potential, but it will not happen overnight. Near-term, the company now has the cash resources to invest strategically. Its value chain will benefit from higher cultivation and the opening of more distribution outlets. Although shares are holding up now, expect volatility increasing after the company reports quarterly results on May 13.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.