Sometimes analysts and investors have nearly identical views on a stock. Take Amazon.com Inc. (NASDAQ:AMZN). Essentially every analyst covering the e-commerce behemoth has the equivalent of a “buy” rating on the company. And with the stock having more than quadrupled over the past four years, finding investors bold enough to be bearish on the name is not exactly easy.
When it comes to cannabis stocks, such uniform views are rare. Broadly speaking, analysts and investors are enthusiastic about the long-term growth trends of the legal marijuana market, whether because of the increased legalization of recreational cannabis in the U.S. or the booming demand for CBD products. However, the Street is not as enthusiastic about every publicly traded cannabis company.
Aurora Cannabis (NYSE:ACB) is a prime example of the many diverging viewpoints on the Street about each marijuana stock. Aurora Cannabis is a Canada-based company that makes and distributes medical marijuana. ACB stock is up a stellar 52% so far this year, but that has not been enough to seduce every analyst covering the stock.
For example, Stifel analyst Andrew Carter recently initiated coverage of Aurora Cannabis stock with a “hold” rating, noting that it, along with its rival, Tilray, Inc. (NASDAQ:TLRY), is heavily dependent on liberalization of medical marijuana laws in international markets, a theme that could be slow to materialize.
“The Stifel analyst warns that these cannabis stocks are volatile and currently trade at generous enterprise values of 10-times their estimated 2021 year sales,” according to Barron’s. “Any pullback in the sector would be a problem for Aurora, which needs to raise capital to fund its ambitious production build out.”
A case can be made that ACB stock has already experienced a whopper of a retrenchment. Although Aurora stock is up 52% this year, ACB stock remains 40% below its 52-week high. As a result, ACB stock has entered a bear market, based on the strict definition of the term.
A Competitive Threat
For Canadian cannabis producers like Aurora, one primary threat comes from Colombia. Canadian companies have to spend heavily on infrastructure to grow marijuana in the country’s often uncooperative climate.
A recent Barron’s article notes producers north of the border are hoping to eventually drive costs to below $1.50 per gram, but costs in Colombia, home to a climate more conducive to weed production, never exceed 50 cents per gram and can be lower.
Aurora recently said that its production costs are around $1.06 per gram. Production expenditures, like so many other things in the cannabis business, are not uniform across the industry, Aurora’s costs are lower than those of some of its Canadian rivals.
For investors considering ACB stock, it is worth noting that the competitive challenges in any industry can be overstated. And while the bears have had plenty of ammunition with which to pressure Aurora stock, they have woefully failed at doing so this year.
Adding to the bull case for Aurora Cannabis stock is the company’s production efficiencies. Its cultivation technology is robust, lowering its overall costs.
And when it comes to competing with Colombia, Aurora is arguably one of the companies best-positioned to do so because of its sizable footprint in Uruguay, the first country to legalize recreational cannabis.
The Bottom Line on ACB Stock
Undoubtedly, Aurora Cannabis stock is expensive based on traditional valuation metrics. But mid-cap growth names like ACB stock are rarely cheap. If they were, they would likely be mid-cap value stocks.
And some analysts are bullish on ACB stock. Bank of America Merrill Lynch’s Christopher Carey recently rated ACB stock a “buy,” and two other analysts have the equivalent of “buy” ratings on Aurora Cannabis stock.
Aurora Cannabis stock is not perfect, but if the company can continue bolstering its operational efficiencies while penetrating markets outside of Canada and Germany, ACB stock could reward risk-tolerant investors.
Todd Shriber does not own any of the aforementioned shares.