Aurora Cannabis (NYSE:ACB) is not a company that I would want to own. Other than being a cannabis player, ACB stock doesn’t seem to have much going for it as a potential investment.
To me, ACB appears overextended, over-leveraged, and overvalued. It is no surprise that Aurora stock has fallen about 30% since March while the broader markets have rallied. Here are some of the issues that the company has to deal with.
Outdoor versus Indoor Growing Costs
A reckoning will soon impact the cannabis market. This will happen when investors realize that the cost advantage of outside growing far outweighs any disadvantages when compared to inside growing.
Some experts estimate the cost of outdoor growing to be just 15% of growing in an enclosed facility. So-called weedpreneurs consider indoor growing more secure and creates a higher quality product. But guess what? It is called “weed” for a reason.
Weeds grow rapidly outside. Around the world, producers grow high-quality cannabis outdoors in various environments. Marketers may even use outdoor growing as a positive. I can see it now: Grown with natural sunlight!
All joking aside, ACB and the other growers that are mainly internally focused will face intense price competition soon. And that hurts the case for Aurora Cannabis stock.
Is Aurora Moving Too Much, Too Fast?
I believe that Aurora has taken on more than it can efficiently manage. Although it’s not unusual for marijuana firms to adopt acquisitive strategies, ACB takes the cake. Recently, management pulled the trigger on 17 companies. It’s not clear if any of these will really pan out for ACB stock.
In addition, Aurora has made 12 strategic investments. Management likes to talk about the 88,000 patents that it owns. However, I do not see how anyone can reasonably keep track of such a vast portfolio. Considering that this sector is competitive enough, it’s another worry impacting Aurora stock.
Share Dilution Hurts ACB Stock
Aurora’s shopping spree has led to significant share dilution, and that is not a good thing. In my spare time, I love to read about Wall Street history. One of the most interesting events that happened on the Street is known to historians as the Erie War.
This was a fight over the Erie Railway Company that occurred in the 1860s. While Cornelius Vanderbilt was trying to take control of Erie by buying shares, Erie’s board of directors just kept issuing and printing new shares to sell to him. In doing so, the company became more and more diluted.
This kind of reminds me of the takeover shopping spree that has impacted ACB stock. Want to buy yet another company? No problem. Issue more shares.
Most of the acquisitions that Aurora has made have been financed by the issuance of new shares. In theory, this should not matter because management is supposedly buying something of equal or greater value. But in the real world it doesn’t always work like that. In my opinion this dilution of Aurora stock is a negative.
Goodwill Is a Cautionary Tale for Aurora Stock
Ever since I started analyzing companies, the concept of goodwill has interested me. Goodwill represent intangibles such as corporate reputation. And how would the markets define “reputation?” It is the premium above the value of the company’s assets.
This will be added to the company’s balance sheet as an asset. So basically, if a company goes around overpaying for other companies, the value of the company will increase by the amount that it overspent. And here’s where things get tricky for Aurora Cannabis stock.
In its last earnings release, Aurora reported almost goodwill of $3.2 billion CAD. This is an astonishing 57% of the value of the company. In theory, this means that over half the value of the company is associated with ACB overspending on its buyouts. This is way too high for my comfort level.
Although I don’t speak for everyone, I suspect it’s too high for most conservative investors. Therefore, it’s another reason to steer clear of Aurora stock.
Don’t Fight the Tape
Click to Enlarge It isn’t surprising that ACB stock has not performed well. Since March the price has fallen by almost 30% while the broader markets have rallied to all-time highs. My guess is that ACB stock will continue to underperform. I see no reason to invest in it. I would even go so far as to say you would need to be stoned to want to own it.
As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.