Earlier in July, Canada’s Aurora Cannabis (NYSE:ACB) stock was downgraded to neutral from its previous buy rating, mostly due to concerns over its spending levels and the potential to need funding in the coming quarters. ACB stock price is now hovering around $6.50, the lowest level for 2019.

At present, Aurora is Canada’s largest producer, which gives the company certain economies of scale. Understandably investors are wondering what may be next for Aurora Cannabis stock given the recent decline in the price. Let’s look at the company fundamentals as well as the stock price.

How ACB Stock Makes Money

For cannabis investors, ACB stock needs little introduction. Especially in its early days, Aurora Cannabis stock was can’t-miss for investors. Yet since March, it has come off a long way from peak performance.

The Edmonton-based pot grower is a leading producer in Canada. Management has said that the aim of Aurora Cannabis is to reach 700,000 kilograms of cannabis production per year (or about 1.5 million pounds).

More than 260 million adults worldwide consume cannabis at least once per year, collectively spending $344 billion annually, according to the cannabis research firm New Frontier Data.

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Aurora Cannabis, which aims to capture an important part of this growth, has three key target markets:

• Canadian consumer (i.e., retail recreational)
• Canadian medical
• International medical

So far in 2019, although Aurora Cannabis has achieved more recreational marijuana sales than medical cannabis revenue, the two segments have been very close, split almost 50-50. In general, of these three areas, Canadian retail recreational is the most important one for the industry. Similarly, in the U.S., only 20% of sales come from the medical side. ACB stock is unique in its strength in the medical market.

ACB’s latest Q3 fiscal 2019 earnings report from May showed a 37% revenue increase in the Canadian consumer section. Canadian medical revenue was up 8% and international medical revenue was up 40%.

Many analysts highlight the importance of the medical cannabis markets for ACB stock. The medical marijuana market operates with a higher margin than its retail recreational counterpart.

Several analysts have also praised ACB’s continued operational progress, including diversified geographies into Europe and medical sales with higher margins. The company has operations in over two dozen countries.

However, it will probably be several quarters before investments in medical marijuana as well as global markets pay off and turn into further profits.

What to Expect From ACB Stock’s Next Earnings

When ACB stock releases earnings in August, there are several important metrics and issues investors will pay attention.

Aurora’s Q3 fiscal 2019 results disappointed analysts as despite the 367% YoY revenue growth, ACB missed analyst estimates by a wide margin.

Furthermore, like other cannabis producers — such as Canopy Growth (NYSE:CGC) or Tilray (NASDAQ:TLRY) — ACB is not able to convert the exponential revenue growth into real profits. Aurora Cannabis said it lost CAD $160.1 million ($121.8 million), or 16 cents per share.

Like its peers, ACB also has high operating expenses. To the concern of analysts, running low on cash has become the industry norm. In other words, Aurora Cannabis is spending a lot of money to make some cash. And the red ink at the bottom of ACB’s income statement, quarter after quarter, is becoming a worry for shareholders.

In Q1 fiscal 2020, Aurora will have to pay a CAD $230 million convertible debt, which is currently out the money. In other words, this debt will likely be paid in cash unless ACB share price rallies in about half a year.

Our readers may remember that Tesla (NASDAQ:TSLA) also had a similar convertible bond payment earlier in March, which triggered a host of cash flow issues for the auto maker.

As the recent stock downgrade highlighted, unless Aurora Cannabis tightens up its financials, Wall Street as well Canadian investors may not too forgiving.

Considering ACB’s expansion plans, bottom line results could get a lot worse before they get better. In other words, is the business model sustainable?

Upcoming earnings reports from ACB as well as its peers will be important for the industry, as not everyone is convinced that especially Canadian recreational pot sales will remain strong. If Canadian weed demand softens, ACB’s revenue would also be hit.

And if the international cannabis market does not grow as expected, then the stock price could experience further selling pressure.

Therefore, shareholders may decide to wait to hit the “buy: button on ACB stock until they have seen the next earnings results in August. Wall Street will be keen to analyze whether Aurora will grow both recreational and medical sales it achieved last quarter and if the company is in a position to attract a partner company.

Other Concerns That May Affect ACB Stock

Recent industry developments in Canada have put many investors on alert: Health Canada, the national regulator north of the border, has — due to “unauthorized activities” — revoked both the producer and the dealer licences of Canada-based cannabis producer Agrima Botanicals, which has been under creditor protection for several months.

Again in July, cannabis sales of another Canadian company, CannTrust (NYSE:CTST), got put on hold by Health Canada for unlicensed growing. In other words, for the first time since legalization of pot in Canada, the issues of clarity, compliance and transparency have hit the headlines in a matter of few weeks.

Could these developments regarding non-compliance come to haunt other shares, such as ACB stock?

Analysts are also concerned that Aurora Cannabis does not seem to be interested in partnering with other companies. Many regard strategic partnerships as the key to long-term success in this volatile industry. Investors are not sure what, if any, the U.S. strategy for hemp, which is now legal to produce, will be.

In March, when billionaire activist investor Nelson Peltz joined the group as a strategic advisor, investors applauded. However, over the past four months, there have been no partnership developments. Yet, the stock may be in need of attracting a larger investor, possibly one based in the U.S., in order to write the next chapter in growth.

Where Aurora Cannabis Stock Price is Now

Investors in the cannabis sector are also aware of how volatile the price of Aurora Cannabis stock and its peers can be. After starting 2019 around $5, on March the stock saw an intraday-high of $10.32. However, marijuana stock investors haven’t been very bullish on the industry in recent months.

Since mid-March, there’s been selling pressure on ACB stock and the mixed earnings results for fiscal Q3 2019 put further pressure on the price of ACB shares and other weed stocks. On May 31, it finished the month at $7.59. Following a choppy June, so fay July has also been a tough month for ACB stock.

In other words, the downtrend since this spring is a stark reminder that ACB’s all-time high of $12.52 in October 2018. With the high prices of 2018 fading in the rearview mirror, many investors are now wondering if the bears may possibly push the shares below $6.50.

ACB stock’s short-term technical chart looks weak, pointing to the possibility for more downside around the corner. Expect nearer-term trading to be choppy at best, possibly until the earnings announcement date in August.

If there is any broader market weakness in Canadian stocks — say due to market worries over U.S.-China trade wars or because of a general weakness due to disappointing earnings — Aurora Cannabis share price may also be adversely affected further.

Later in the year, if you still believe in the bull case for Aurora Cannabis stock, you might consider waiting for a better time to get long, such as around $6.00.