Analyst downgrades can cause market moves, along with a dose of FUD: Fear, Uncertainty, and Doubt. In the case of Aurora Cannabis (NYSE:ACB) stock, one particular analyst was especially harsh on this popular company, causing the share price to decline precipitously.
If anything, this ought to be viewed as a prime entry point on a solid company, not an excuse to panic-sell your shares.
When it comes to Aurora stock, I prefer to move beyond the FUD and just stick to the facts — a policy that’s worked exceedingly well for my investment portfolio.
Why ACB Stock Is Under Fire
In order to assess whether the criticism of Aurora Cannabis stock is justified, we have to first look at the source, which in this instance is Bank of America Merrill Lynch analyst Christopher Carey. Carey downgraded ACB stock from a “buy” rating to “neutral.” He also lowered his price target from $10 to $8, or approximately 15% above its current trading level.
Carey started out charitably enough, observing that “Aurora has emerged as one of the best operators in the cannabis sector, with industry leading scale and margins even versus other large peers, and global optionality.” He’ll get no argument from me on those points.
Then the claws came out, with Carey focusing on negative cash flow:
However, despite this, and a focus on profit, (positive EBITDA target for the second quarter), it is burning cash and by our estimates could be cash negative by first quarter 2020 (absent financing), namely if a large convertible debenture due in the first quarter stays out of the money.
Is the ACB Stock Criticism Justified?
Phrases like “burning cash” can scare off skittish shareholders, and evidently Carey’s harsh verbiage was enough to send Aurora Cannabis stock tumbling in the short term. As a facts-focused investor, however, I wanted to find out whether this is a bona fide cause for concern or just another FUD freak-out.
Personally, I’m leaning towards the latter scenario. Aurora has $400 million worth of cash and equivalents in the bank, and only $313 million in long-term debt, so I don’t view it as company that’s in financial straits. And it’s not as if Aurora’s spending is unjustifiable: the company’s cannabis production projected increase from 150,000 kilograms this year to an astounding 625,000 kilograms next year will cost money, but I see this as an auspicious scale-up that should yield sizable returns over time.
Aurora Is No Spendthrift
Judging by Carey’s assessment, one might surmise that Aurora is in the habit of wasting cash. As I see it, though, Aurora’s business model is a paragon of low-cost production, with costs expected to decline to under $1 per gram in the near future — a major advantage in an increasingly competitive market.
And let’s face it: Aurora’s international presence is the strongest of any cannabis cultivator, even including Canopy Growth (NYSE:CGC). I expect global sales to become an increasingly larger percentage of Canopy’s business, as well as the cannabis market as a whole.
Again, establishing a multinational footprint will cost money and be a driver of debt, but it’s a savvy investment with the potential to yield stronger earnings and enhanced shareholder value for ACB stockholders.
The Bottom Line on Aurora Stock
The sadistic side of my investing personality actually enjoys it when big-bank analysts pummel a perfectly good stock like ACB. It only provides an opportunity to capitalize on the FUD and grab some Aurora shares before the Fear, Uncertainty, and Doubt morph into Earnings, Revenues, and Profits.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.