The Growth of Aurora Has Largely Come at the Expense of ACB Stock

The owners of ACB stock are being hurt by dilution

Aurora Cannabis (NYSE:ACB) stock has steadily declined since late March. At a time when the S&P 500 continues to make new record highs, ACB stock and marijuana stocks in general have moved in the other direction. The industry has suffered after Canopy Growth (NYSE:CGC) fired its co-CEO and regulators caught CannTrust (NYSE:CTST) growing weed in unlicensed facilities.

Dilution Is Hurting the Owners of Aurora Cannabis (ACB) Stock
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The slow process of legalization in the U.S. has likely weighed on all marijuana stocks. However, triple-digit revenue growth by cannabis companies could foster a recovery. Also, despite a recent pullback, ACB stock and other cannabis equities trade at high valuations. While the cannabis industry should prosper, the actions of Aurora Cannabis could make it difficult for investors to benefit from this growth.

Aurora Cannabis Versus ACB stock

Investors should not view Aurora Cannabis and ACB as identical entities. From a business standpoint, I think Aurora has made some wise acquisitions. These deals have made it the world’s largest cannabis producer. Given the bubble-like valuations of marijuana stocks, I cannot blame Aurora for issuing massive amounts of ACB stock. I agree with my colleague ,James Brumley, that this dilution of Aurora stock will ultimately benefit the company.

But the key question for investors is if it helps the owners of ACB stock. I have trouble seeing the benefits of the share dilution for these investors. As I pointed out in a previous article, the number of shares outstanding of Aurora stock rose from about 129 million in 2016 to 1.003 billion as of the end of the first quarter of 2019.

ACB Remains an Expensive, High-Growth Equity

The dilution has helped to take the price of Aurora Cannabis stock down by almost 28% over the last four months, and by nearly 43% from its highs of last October. Despite that drop, ACB stock currently trades at about 56 times its sales. This lags Canopy Growth and other large Canadian peers such as Cronos Group (NASDAQ:CRON) and Tilray (NASDAQ:TLRY).

In fairness, the anticipation of legalization has driven cannabis stocks higher in the past. The United States and several other countries continue to move toward legalization. That trend alone could reinflate marijuana stocks. Moreover, analysts, on average, expect revenue growth for Aurora of almost 385% this year and over 156% in 2020., Consequently, traders should not assume that the multiples of ACB stock will necessarily compress anytime soon.

Aurora Is Financing Its Operations With ACB Stock

Even if Aurora stock price remains the same, it will still have an elevated price-sales (PS) ratio. Considering the recent behavior of the company, one has to assume acquisitions and dilution will continue. Those deals could make Aurora Cannabis’ business bigger and better. Still, investors buy equities because they want returns on their investments. But instead of reaping profits from Aurora stock, they may finance the cost of the company’s expansion.

This growth could make ACB stock a buy some time in the future. However, by that time, marijuana stocks like ACB will probably resemble the equities of the large companies that are investing in them now. Emulating Constellation Brands (NYSE:STZ) and Altria (NYSE:MO), marijuana stocks will likely eventually trade at price-earnings (PE) ratios at or below the S&P 500 average. They may also pay significant dividends. Under these conditions, Aurora Cannabis stock may become a lucrative income play.

Final Thoughts on ACB Stock

But Aurora Cannabis will likely serve as the biggest obstacle to the growth of ACB stock for the foreseeable future. Aurora has solidified its position as the world’s largest cannabis producer. However, the company has financed its growth by significantly diluting ACB stock. The number of shares outstanding has grown by about 800% over the last three years. While ACB  probably invested the funds well, its actions have made it considerably harder for the owners of ACB stock to benefit from their investment.

Someday, the hype that’s lighting a fire under marijuana stocks will fade. At that point, they will probably become profitable, slower-growth, dividend-paying companies. ACB stock should become a solid investment at that time. However, given  the recent dilution of Aurora stock, I would stay away from the shares for now.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


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