Aurora Cannabis (NYSE:ACB) faces a conundrum. The company continues to make key acquisitions. that have increased its production capacity. As a result, Aurora has become the largest producer of cannabis, but issues with ACB stock itself should make investors pause before buying the shares. Given the company’s finances, investors might want to buy other marijuana stocks besides Aurora.
In a recent article, I stated that the market has correctly given ACB stock a lower valuation than that of its peers. Its price-sales ratio of just above 61 lags that of Canopy Growth (NYSE:CGC), Tilray (NASDAQ:TLRY), and Cronos Group (NASDAQ:CRON).
Aurora Is the Leading Producer of Cannabis
Aurora has excelled in some areas. Its purchase of MedReLeaf raised its production capacity to an estimated level of 570,000 kg. That placed ACB ahead of the company seen as the industry leader, Canopy Growth. Some have also speculated that Aurora Cannabis will become the first company to reach the 1 million kg per year mark.
Aurora also made a key move in the increasingly important Latin American market last year. In November, Aurora acquired Uruguay-based ICC Labs for around C$290 million ($216.7 million). That does not sound like a huge deal on the surface. However, it gives Aurora a 70% market share in Uruguay, the first country to fully legalize marijuana. Through the deal, Aurora also obtained licenses to produce medical marijuana in Colombia and export CBD products to Mexico.
Strategic, Financial Issues Weigh on ACB Stock
Unfortunately, analysts have defined Aurora Cannabis stock by what the company has not done. Since it lacks a presence in the U.S. hemp industry or a partnership with a huge company, such as the one Canopy Growth has with Constellation Brands (NYSE:STZ), ACB stock has not commanded the premiums of its large peers.
ACB stock is facing other problems. Other InvestorPlace columnists have pointed out that the company has a large amount of goodwill from various acquisitions. The company reported $3.177 billion of goodwill as of the last quarter. This constitutes a majority of the $5.55 billion of total assets on its balance sheet.
The dilution of ACB stock also raises some red flags. The shares of Aurora stock outstanding have risen from about 129 million in 2016 to just over 1 billion today. That has kept its long-term debt at a relatively modest $418 million. However, the increased share count makes it much harder for Aurora to increase its earnings per share.The higher share count also makes it harder to profit from ACB stock.
Do Not Invest in ACB Stock Because of Its “Number Two” Status
ACB stock trades at about $7.50 per share as of the time of this writing. Despite this, traders tend to think of Aurora Cannabis as the second-largest marijuana company. In most cases, I agree with Jack Welch’s strategy regarding second-place companies. When he was the head of GE (NYSE:GE), Welch preferred to buy the number one or number two company in an industry. However, after the massive dilution, Aurora stock is a second-place company I would rather avoid.
In this sector, I see CGC as the stock of choice among the more prominent names. Alternatively, I would look to either Aphria (NYSE:APHA) or Hexo (NYSEAMERICAN:HEXO), two up-and-coming marijuana stocks which trade at lower valuations. Also, unlike ACB stock, analysts believe these two companies will earn a profit next year.
Final Thoughts on ACB Stock
Aurora Cannabis stock should be avoided. With its lead in production capacity and its dominance in Uruguay, I expect the company to survive. However, the stocks of companies that barely manage to survive usually don’t rise.
Unfortunately, ACB’s fundamentals aren’t strong enough to lift Aurora stock much. Both its balance sheet and the massive dilution of ACB stock give investors few reasons to have confidence in Aurora. Instead of buying ACB stock , traders would be better served by buying other firms in the cannabis space.
As of this writing, Will Healy is long APHA stock. You can follow Will on Twitter at @HealyWriting.
