It appears that marijuana stocks like Aurora Cannabis (NYSE:ACB) are headed towards a crossroad. The optimism toward the sector is obvious and logical, but it has already led to huge gains in Aurora Cannabis stock. The stock has gained 44% in 2019 alone, and it is up 68% over the past year.
That said, there are some signs that the optimism is fading — or perhaps that investor patience is waning. ACB stock has pulled back in recent sessions, as has the most valuable company in the industry, Canopy Growth (NYSE:CGC). Investors sold off Cronos Group (NASDAQ:CRON) following earnings this week, despite a long slide into the report. Revenue growth estimates from Aurora Cannabis are coming down steadily, and analysts see signs of trouble elsewhere as well.
And so Aurora Cannabis earnings next week seem reasonably important. As I wrote back in February, Aurora Cannabis is taking a different tack than many of its rivals. Strong earnings — and perhaps more importantly, positive commentary from management — could go a long way toward validating that strategy and creating a more solid base for ACB stock and perhaps the industry as a whole.
ACB Stock Pulls Back
It’s not hard to see some cracks in the story surrounding marijuana stocks on the whole, and Aurora Cannabis stock in particular. Most stocks in the sector, including ACB, still are below October highs. ACB stock has pulled back about 16% from mid-March levels.
There are some modest concerns at the moment. Supply in Canada is proving to be a brake on sales in that country’s recreational market. At the same time, longer-term concerns of oversupply, as highlighted by management at Tilray (NASDAQ:TLRY), are raising concerns about what margins and profits might look like in the future.
Meanwhile, it’s tough to see a near-term catalyst for the sector. The legalization of hemp in the U.S. Farm Bill spiked the sector in December, but wider legalization domestically still seems years off. Movement internationally seems limited as well.
Meanwhile, valuations remain high: ACB stock itself trades at almost 30x fiscal 2019 revenue estimates. A bull market can keep those valuations intact, at least for now. But any weakness in the broader marijuana story could change that. And it’s hard to see the sector moving higher from here without a more compelling story to tell.
Aurora Cannabis Earnings
That seems to set up an important report for Aurora Cannabis on Tuesday afternoon, which will be followed by a conference call on Wednesday morning. That might be true for the sector as much as for ACB. Aurora, after all, has one of the broader reaches of any cannabis company in the world.
It has operations in 24 countries. It’s developing production capabilities, has launched softgels, and operates in both the wholesale and retail channels. That wide reach is why I’ve long argued that Aurora is both the highest-risk and highest-reward play in the space.
That reach raises concerns. Ian Bezek noted in December that Aurora was making an awful lot of deals … and perhaps too quickly. There’s a risk that Aurora, as Bezek put it, will be “spread too thin”. It’s raising money to do even more, and brought on famed investor Nelson Peltz to help drive its strategy.
Aurora needs to convince investors that the funds will be spent wisely. That requires a coherent strategy — and detailed logic behind the myriad deals the company is funding with the millions of dollars it’s raising. It’s likely that discussion on the call on Wednesday morning will be more important than the numbers released Tuesday afternoon, particularly with fundamental expectations being lowered heading into the release.
Watch Out for Marijuana Stocks
It’s likely that commentary will read across to other marijuana stocks as well, as Cronos’ report did on Thursday. There’s not a lot of news in the sector at the moment, leading to quite a bit of speculation. Aurora’s reach should give it a view into all reaches of the industry, and to highlight both opportunities and risks.
From here, it seems like it will take a big report from Aurora to move both ACB stock and other pot plays higher. Many investors are sitting on profits they may look to take. There’s enough worry about supply and margins to justify a haircut to currently high valuations. Even with Peltz’s involvement, there’s still no sign of another big company like Altria (NYSE:MO) or Constellation Brands (NYSE:STZ, NYSE:STZ.B) entering the space. The sector probably needs a catalyst, and Aurora earnings might not be enough.
As of this writing, Vince Martin has no positions in any securities mentioned.