Aurora Cannabis (NYSE: ACB) is trending downward. Shares in the Canadian cannabis giant have slid from ~$10/share in March to ~$6.75 share today. Aurora stock tumbled thanks to negative investor sentiment for the sector, as well as a recent analyst downgrade. With this recent turn, the party may be over for the cannabis space.
Should investors bail on Aurora Cannabis stock, or double down on the dip?
The investment community is falling out of love with the cannabis sector. The major publicly-traded cannabis growers have experienced a plethora of bad news in recent weeks.
CannTrust Holdings (NYSE: CTST) cratered after HealthCanada found the company had been growing cannabis at unlicensed facilities. Canopy Growth (NYSE: CGC) fired its co-CEO.
ACB stock is not immune to this bearishness. Just last week, BofA analyst Christopher Carey downgraded the stock, citing the company’s need for a capital infusion as a red flag.
A Closer Look at Aurora Stock
Investors know the sector is overvalued. These crumbs of bad news are all it takes to drive negative sentiment. But is this negative perception justified? Can ACB stock plow through these issues, and turn its tumbling share price around? While the company continues to rack up small wins, fundamental risks continue to outweigh these positives.
As I’ve said before, Aurora’s strategy is to pursue legalized cannabis opportunities around the globe. This is in contrast to its peers such as Canopy Growth, who prefer to bet big on full U.S. legalization. Aurora recently won a tender to supply 400 kilograms of medicinal cannabis to Italy. This news is not a big needle-mover. But it does show the company continues to make progress with a more diversified strategy.
Italy is a highly regulated cannabis market. The Italian government tightly controls price and distribution. Aurora is willing to play ball with highly regulated markets because they’re playing the long game. By establishing good relationships in various countries, they hope to get controlling market share. But this small victory does little to address ACB stock’s biggest concern: cash burn.
BofA downgraded the stock due to cash burn concerns. InvestorPlace contributor Wayne Duggan broke it down in his recent article. The company has convertible debentures due next year. Shares now trade below the conversion price.
If shares manage to rally back up above the conversion price, the company will face dilution as it issues more common stock. Aurora Cannabis stock still faces dilution if the debentures cannot be converted, as additional equity capital must be raised to pay off the debt.
Another heavy concern weighing down ACB stock is Canadian oversupply. Finished and unfinished inventories outweigh sales. The rollout of edibles later this year could help reverse this trend. But given edibles are a niche market, additional catalysts are needed to resolve this issue.
Bottom Line: It’s Time to Sell Aurora Stock
Despite many risks plaguing ACB stock, the company has a clear strength over its competitors. By focusing on multiple markets worldwide, Aurora Cannabis has more optionality as opposed to peers focused on cornering the American market once it fully opens up.
Cannabis stocks continue to be overvalued. Investors today continue to have high expectations for legal cannabis. But with negative news impacting the sector across the board, the writing is on the wall. Cannabis industry stocks will likely see a continued short-term decline.
ACB stock faces many hurdles. While it continues to win by placing its bet widely across the globe, the company cannot avoid the issues plaguing the Canadian cannabis space. Oversupply needs to be resolved ASAP. The rollout of edibles later this year is not enough to soften the blow.
Aurora’s cash burn is another major red flag. The company faces dilution risks whether or not they can convert their debentures into common stock. Investor Nelson Peltz came on board this year, presumably to help the company find a strategic partner to pump capital into Aurora and fuel future growth. But so far this has yet to emerge.
With the company’s negatives outweighing the positives, it’s time to sell Aurora stock. The cannabis space has potential long-term. But in the short-term, ACB stock could fall further. The safe bet is to wait for a better entry point.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.