Why Aurora Cannabis Stock Might Fall to $6 Per Share Soon

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Aurora Cannabis Inc. (NYSE: ACB) has largely continued its downward trend that started after ACB stock spiked above $10 in mid-March. Aurora stock is now in danger of falling below the $7.00 level. Although the weak quarterly earnings report from Canopy Growth Corporation (NYSE: CGC) may explain part of the drop, there are other reasons for the selling pressure on ACB stock.

Business Developments

When The Global Cannabis Shake-out Comes, Will Tilray Still Be A Leader?On Jun. 21, Aurora announced its plans to expand its consumer line of products. It will broaden its consumer-cannabis product line by launching vapes, concentrates and edibles. Aurora will also boost its marketing efforts with a national public awareness campaign in the fall. By educating consumers and retailers about the safety of consuming these derivative products, Aurora hopes to spark strong sales of them.

Intense marketing efforts typically lead to higher sales growth, but investors are cautious. Last quarter, the company’s fiscal Q3, Aurora’s net revenue grew three-fold year-over-year to $65.1 million,  but it rose only 20% versus Q2. Aurora lowered its dried-cannabis cash production cost by 7%, but its average net selling price fell 20%. The average selling price (ASP) of its cannabis extracts also fell, declining 14%. The drop in Aurora’s ASPs suggests that it will have to spend a great deal and have highly effective ads to offset its falling prices with higher sales volumes.

Marketing Effectiveness Unknown

Aurora’s education and awareness campaign will distinguish its product quality from that of its competitors while promoting the responsible consumption of cannabis edibles. The owners of ACB stock may notice that the ads have increased the company’s marketing costs, leading to higher losses in the short-term. Still, if the ads resonate with the target audience and establish brand loyalty, they will enable Aurora to benefit from sustained revenue growth.

Supply Agreement

Aurora recently entered into a supply agreement with PAX Labs Inc. PAX is a device producer that is set to launch new types of vape products. Under the deal, Aurora will offer products in pods that are compatible with PAX’s devices. Offering more products could spur increased sales for Aurora, benefiting Aurora’s results and ACB stock.

Aurora  established production hubs in Western and Eastern Canada in anticipation of higher demand for its vapes, concentrates, and edibles products. The centers cumulatively have over 450,000 square feet of space. Its manufacturing facility, Aurora Air, has an area of  20,000 square feet. Once Aurora receives its license from Health Canada, it will begin producing edible products.

Strong Downward Momentum

Investors cannot ignore the strong downward momentum of Aurora stock that began in March. After the stock tried and failed to hold the $9.00 level in April and early May, its selling momentum accelerated.

At its recent price of $7.83 and its market cap of $7.9 billion, ACB stock is expensive and trades at around 28 times ACB’s annualized Q3 sales.   ACB’s results need to improve to justify its share price. That looks poised to occur in the future. As the company’s net revenue continues to grow three-fold or more each quarter, its price-sales ratio will fall. In the near-term, however, Aurora stock could drop to around $6 per share. That is below the mid-point between its 2019 low of $5.00 and its peak of $12.52.

Other cannabis stocks like Tilray, Inc. (NASDAQ: TLRY), Canopy, and Cronos Group (NASDAQ: CRON) are also rangebound. If investors buy those names first instead of ACB stock, chances are good that Aurora Cannabis stock will drop.

Other Risks Facing ACB Stock

The sequential declines in the revenue of Canopy Growth’s recreational, medical, and international businesses suggest Aurora’s expansion may not boost its results a great deal.

Aurora is just starting to produce edibles and vapes. As it enters those markets, there’s a good chance that Aurora will face higher than expected costs and lower sales relative to its projections.

The Bottom Line on ACB Stock

The recent downward pressure on Aurora stock is driven by negative emotions. Wait for the downside momentum to shift before considering going long on Aurora Cannabis stock.

As of this writing, the author did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


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