Marijuana was one of the hot investment niches of 2018. In 2019 pot stocks are a battlefield. Aurora Cannabis (NYSE:ACB) is a good example: Since January it’s up over $2 per share, or 54%, but those gains have pared some 23% since ACB stock hit a high in March.
Pot stocks are volatile, subject to quick manias and deep depressions. There’s not much track record for investors to go on. What there is tells you nothing about what valuations should be.
During its most recent March quarter, the third of its fiscal year, Aurora lost almost $159 million on revenue of $78 million. That revenue number was 21% over the previous quarter, while losses were trimmed by one-third. Revenue was closely split between medical marijuana sales and recreational cannabis, with sales per gram at $6.40, down from $6.80 the previous quarter.
Guess What’s Coming
For the June quarter, due to be reported August 13, analysts are expecting Aurora to come close to break-even, a loss of 2 cents per share of ACB stock on revenue of $86 million. That means sales should total $277 million for the year, on a market cap of $7.73 billion.
I’ll have what he’s smoking.
The bottom line is that pot stocks are like a seething volcano, or a financial pimple about to pop. Everyone is just guessing about how fast they can grow, or how high they can go.
So if someone wants to say Aurora has “the necessary infrastructure to weather early storms in adult use while continuing to grow higher-value revenues in the medical market,” and put a price target of $11.44 on the stock, that’s valid.
If someone else wants to say that Aurora is contributing to dramatic oversupply in the market, because Ontarians aren’t toking up as much as people thought, or that regulators have let it down and the stock is diluted, that’s also fine.
Here’s What Really Matters
You’re buying the future, not the past, and the future of marijuana looks very bright to bulls. Young investors have made Aurora Cannabis their favorite stock. They see even such cloud plays as Facebook (NASDAQ:FB) as tired, and the pot market as wired.
The market analysts at Stifel sees the cannabis market growing to $200 billion in the next decade, from $8 billion currently. The only uncertainty for bulls is when it becomes legal at the federal level, not if.
Aurora is spending for massive growth. The company wants to participate in markets for vaping, concentrates and edibles, not just traditional smoking, with enough supply to expand well beyond Canada, and an education campaign that warns of overuse but doesn’t define it.
Rational investors are waiting to see if Aurora can generate regular profits on recurring revenue. They carefully parse through each income statement in search of hints.
But the statements are opaque, and the bears say they know why. It’s because Canadians aren’t taking to pot as expected. If demand isn’t as huge as was anticipated, Aurora and its peers are a flat-out short.
Bottom Line on ACB Stock
It’s impossible to be certain about how ACB stock, or any pot stock, will do in the future.
We don’t know how fast legalization will occur, or what will happen once the first flush of excitement passes. The experience of Colorado, Washington and now Canada indicates there’s a limit to the size of the market.
We also don’t know how good a drug marijuana is for what ails people. Is cannabis oil or CBD a cure-all or a fad? Can the ingredients in marijuana be isolated to produce pharmaceuticals for pain and the nausea of chemotherapy? What will happen to legal pot once they are?
Nobody knows. It’s all smoke and mirrors. It’s a pure speculation. Play if you like but try not to cough.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
