Aurora Cannabis (NYSE:ACB) shares continue to tread water, with ACB stock trading around between $8-$9/share for the past few months. But is ACB stock a buy today?
Compared to its largest peer Canopy Growth (NYSE:CGC), ACB stock offers investors a better value proposition. This is not to say Aurora is “cheap.” High investor expectations mean that shares continue to trade at a high valuation.
But with concerns with the Canadian market, and a lack of development regarding U.S. expansion, is Aurora Cannabis stock a buy at the current price?
Despite solid potential, I believe now is not the time to buy.
Aurora Continues to Scale
Aurora continues to scale up operations with fewer growing pains than Canopy Growth. Q3 FY19 sales were C$75m, up 21% from the prior quarter. The company has also managed to to keep gross margins and SG&A expenses stable quarter-over-quarter.
In terms of profitability, Aurora is ahead of the pack. The company projects positive EBITDA by the next fiscal quarter.
Based on their June 2019 investor presentation, Aurora is placing its bets across the board to meet growth expectations. With expansion into Europe and Latin America, Aurora Cannabis stock offers investors geographically-diversified exposure to the global legalization trend.
Production capacity is set to grow from 150,000 kg/year in early 2019 to over 625,000 kg/year by 2020. This 4-fold production increase ensures sufficient supply once edibles are legalized.
But this supply growth comes at a risk. If Canada continues to delay edibles legalization, and the current Canadian market remains weak, Aurora’s Q4 positive EBITDA goal may not be realized.
Does ACB Stock Have a Solid Catalyst?
Unlike Canopy Growth, Aurora Cannabis stock has not benefited from a “big deal” signaling future entry into the American market. Instead, Aurora is playing it conservatively, pursuing a series of smaller transactions with greater geographic diversification.
Last March, the company hired Nelson Peltz as a strategic advisor. While best known as an activist investor, Peltz has extensive operating experience in the consumer products space. His experience and talents could help Aurora build a solid partnership with an American beverage or food company. For his expertise, Peltz’s compensation consists of AGC stock options, giving him a strong incentive to help move the needle for Aurora Cannabis stock.
Another catalyst for Aurora stock is their expansion into markets outside North America. The company is pursuing acquisitions and organic growth across continental Europe. In Latin America, their purchase of ICC Labs has been a springboard to build significant market share throughout the region.
Waiting to make a big move in America is a smart strategy. It could be years before the US market fully opens up to legal operators. With this long timeframe, Aurora can wait things out, pouncing on a deal when cannabis company valuations return to more rational levels.
But with this conservative global growth strategy, does ACB stock offer better value than its peers?
ACB Stock Sells At a Rich Valuation, Despite Many Risks
Trading at 61 times sales, Aurora Cannabis stock is no value play. This valuation is in line with peers, most of which trade well north of 50x sales.
With the company yet to make an American-focused deal, Aurora’s valuation looks inflated. Without heavy American exposure, where is the potential for upside? On the other hand, if Aurora announces an American merger deal in the short term, shares will likely see a boost.
Canadian market growth remains a risk. With the legalization of edibles delayed, Aurora’s 4-fold production increase may enter into a flooded market. In this weak market, it may be difficult for Aurora to meet expectations and post positive EBITDA results.
Dilution is another concern. The company has been paying for acquisitions using ACB stock. The company has also filed a “shelf offering” to raise up to $750m for future organic and acquisition-based growth.
Dilution is common in cannabis stocks. Aurora and its competitors need to conserve cash, so why not use their highly valued shares to retain talent and make strategic acquisitions? The flip-side is that this dilution will minimize the upside for existing holders of ACB stock.
Final Verdict: Is Aurora Stock a Buy Today?
Growth investors beg to differ, but I remain skeptical on the upside in ACB stock. Continuing to sell at a high valuation despite facing headwinds (tepid Canadian market, lack of US exposure), weak Q4 results could spell material downside.
On the flip side, for investors looking for exposure to the Cannabis space, Aurora stock may be a better candidate than Canopy Growth. With the company yet to make a “big move” into America, shares could see material appreciation if a deal is announced. The risk/return profile of AGC stock may warrant an opportunity, but investors should remain cautious before taking a position at the current price.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
