Analysts Say the Dilution of Aurora Cannabis Stock Will Eventually Be Worth It

Aurora Cannabis (NYSE:ACB) is already Canada’s biggest cannabis grower, and has set the stage to become one of the world’s biggest by around this time next year.  But on the other hand, ACB stock has made absolutely no progress since the end of 2017.

Aurora Cannabis, ACB stock
Source: Shutterstock

Granted, it’s not the only marijuana stock that’s struggled to gain traction. Canopy Growth (NYSE:CGC), once the poster child for investing in marijuana stocks, has lost much of its luster, and as of earlier this month is looking for a new CEO. Neither New Age Beverages (NASDAQ:NBEV) nor Tilray (NASDAQ:TLRY) has been able to come close to holding on to its explosive gains reaped in September of last year.

That’s  not the performance many latecomers to marijuana stocks were expecting. ACB stock, however, has been particularly disappointing.

Although acknowledged by few cannabis investors, the reality is that marijuana stocks aren’t paying off the way they were supposed to be paying off by this point.

That could be about to change.

Mortgaging the Future

Investors don’t own stocks for where they’ve been. They own the shares for where they’re going.

So the interest in marijuana stocks has been and remains understandable. Jefferies believes the global market for legal cannabis could reach $130 billion by 2029. Aurora Cannabis, which is building an international business, should benefit from that trend. For instance, late last year it shelled out nearly $300 million worth of ACB stock to acquire Latin American outfit ICC Labs.

But Aurora Cannabis, perpetually cash-strapped, is using ACB stock in lieu of currency, diluting existing shareholders’ stake.

That’s not terribly unusual. But it’s not necessarily ideal to utilize the practice to the extent Aurora Cannabis has. As of the first quarter of 2017, 313 million shares of ACB stock were issued and outstanding. Now more than 1 billion shares of Aurora stock have been issued.

The practice, in short, whittles down the potential reward of ACB stock without reducing its risk. That’s not something all the owners of ACB stock signed up for. It’s also likely that Aurora’s growth-by-acquisition strategy will drive further dilution of Aurora Cannabis stock.

Analysts, though, are still largely upbeat on ACB stock.

Is a Payoff Imminent?

The most obvious counter-argument to the practice is also the best one. That is, it takes money to make money. Without money, stock is the next-best option.

If there’s a positive side to all the expensive acquisitions though, it’s yet to fully appear.

But it may be too early to expect Aurora’s investments to bear fruit. Canada only legalized recreational marijuana in October of last year, and the rest of the world is only at various stages of legalization.

On the flip side, the cannabis movement is hardly brand new. Non-psychotropic CBD has been legal for years, even though interest in its potential continues to swell. By this point, there should at least be evidence that Aurora Cannabis, along with its peers, is en route to sustainable net earnings.

And there is. By early next year, Aurora should be in the black, even if just barely.

Source: ThinkorSwim

Cowen analyst Vivien Azer says the company could post its first positive quarterly EBITDA , which would also be  the cannabis industry’s first — when it reports the results for its quarter that ended last month.

Analysts can be wrong. It’s also worth noting that no other analyst besides Cowen’s Azer thinks that ACB generated positive EBITDA last quarter. Still, ACB is moving in a generally positive direction, and that should be positive for Aurora stock. The pace of forward progress still matters, however. Investors are growing impatient.

Looking Ahead for ACB Stock

In the simplest terms, this has turned into a horse race. Can the company start to show signs of enough life within the next few quarters to justify the dilution ACB stock owners are being forced to digest? The go-nowhere volatility demonstrated by Aurora stock for more than a year and a half says investors have doubts.

The pros, however, remain undeterred.

The opposing expectations are making Aurora Cannabis stock tough to trade, and ACB stock will likely remain erratic until it’s clear Aurora can turn a meaningful profit or clearly can’t. Dilution will only add to the erratic action, as traders attempt to price in that headwind.

The bottom line on ACB stock is that if Azer’s optimism isn’t quite merited, the next several months could be as inconsistent as the past few have been. Don’t get your hopes up,  and remain patient. Aurora Cannabis stock  is likely to morph into a long-term dance… a true investment, rather than a mere trade.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website, or follow him on Twitter, at @jbrumley.



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