Aurora Cannabis (NYSE:ACB) bulls are looking tired. ACB stock has now hit $10 on three occasions: January 2018, last fall, and most recently this March. Each time ACB stock has fallen sharply from that resistance level. If Aurora stock can’t get back above $10 soon, the stock could be in deep trouble.
The fundamental picture for ACB stock hardly looks better. Canadian marijuana companies continue to run big losses. We see management controversies developing. A scandal at a rival pot company has people worried.
And the core problem in the Canadian market — excess supply — continues to mount. Even the Ontario market coming online has done little to fix this disturbing trend. Aurora in particular looks to have too much supply given the weak demand trends.
This plays into another mounting concern; companies like Aurora will have to take write-downs if their businesses don’t start generating profits soon. All in all, ACB stock’s recent 21% slide is well-founded and more room to go.
CannTrust: A Big Warning for the Sector
Earlier this week, shares of Canadian marijuana rival CannTrust (NYSE:CTST) plummeted. Investors dumped CannTrust stock on news that regulators had seized a large quantity of its pot inventory. Why would they do that? The government claims that CannTrust was growing marijuana in unlicensed facilities.
CTST stock has gone into free fall. It dropped more than 20% immediately following the news, and has now lost 40% of its value in the past week alone. It’s down 70% from where it traded in March, and has hit fresh two-year lows. It’s a stunning reminder to the rest of the industry that even in generally tolerant countries, like Canada, regulators are still a big concern if companies get sloppy with their paperwork.
Why is this so important to ACB stock in particular? Because Aurora is aiming to be the global leader in medicinal cannabis. As Aurora’s latest corporate presentation notes, it is active on five continents and in 25 different countries. Aurora claims to be the industry leader in both the EU and Latin America.
With such far-flung operations, what are the odds that Aurora will run into regulatory trouble with at least one of its operations? I’m not suggesting Aurora is doing anything incorrectly. But in the course of making so many acquisitions and entering so many markets, it can be hard to keep everything 100% up-to-date as far as licensing and paperwork go. The market, with CannTrust at least, has said that it will take a stock to the cleaners if they run into any government headaches. It’s a big risk to monitor for ACB stock going forward with its unusually extensive global footprint.
Industry Bracing for Write-Downs
A Bloomberg article this week noted that the marijuana industry is facing rough times ahead. Of the big players, analysts expect only Cronos (NASDAQ:CRON) to make positive net income this year. That’s not a favorable result, given that 2019 was supposed to be the big year. Marijuana companies were going to move from story and hype to becoming solid businesses with legalization in place and many other market opportunities opening up.
But the stream of red ink hasn’t let up. On top of that, producers have overwhelmed the Canadian market with way too much inventory. As a result, Bloomberg reported that:
“Instead of profit, writedowns related to unfinished inventory may be in the offing for some Canadian companies. That has some investors voting with their feet, moving out of Canada and into the U.S., where the marijuana companies are generally performing better despite a patchwork of state-by-state regulations.”
Investors have been increasingly moving their funds into the American marijuana plays given the state of the Canadian industry. And we saw a big sign of industry unease when Canopy’s (NYSE:CGC) former CEO was forced out of his position when, seemingly, major backer Constellation (NYSE:STZ) had a disagreement over business strategy going forward.
As Canopy and others have failed to turn acquisitions into profits, this raises the possibility of asset write-downs. Companies like Aurora, Canopy, and Aphria (NYSE:APHA) have bought many other smaller pot firms. Bloomberg Intelligence analyst Kenneth Shea says these companies will have to take charges against earnings in coming quarters if those assets don’t start producing profits.
ACB Stock Verdict
Yes, the price of Aurora stock has gone down a lot recently. But that doesn’t necessarily mean it is cheap yet. Just look at CannTrust’s non-stop plunge from $10 to $3 since March. What looks cheap often gets a lot cheaper.
Let’s face it: The Canadian marijuana industry is suffering from a big shakeout at the moment. People dreamed of easy profits following legalization. But it isn’t working out that way. Aurora has a unique pitch for investors with its focus on medicinal and international markets, but that brings its own share of risks. With sentiment turning downward — with good reason — ACB stock could have a good deal farther to fall.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.