From day one, I have supported marijuana-based investments. Over the long-term, I see tremendous potential in Aurora Cannabis (NYSE:ACB). That said, I must admit candidly that my cheerleading hasn’t been the most accurate. To my chagrin, ACB stock continues to test my patience.
I’m not just referring to the nearly 32% loss in equity value since mid-March of this year. That’s just the print. On a technical level, I’m concerned that Aurora stock never convincingly attempted to break out of its bearish trend channel. Furthermore, it’s the same story among Aurora Cannabis’ major competitors, such as Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY).
Adding insult to injury, Aurora stock recently received an analyst downgrade. As our own David Moadel pointed out, Bank of America analyst Christopher Carey demoted shares from “buy” to “neutral.” His reasoning? The company’s cash burn could turn its cash position negative as early as the first quarter of 2020.
As we all know, cash is king. Another one of my InvestorPlace colleagues, Thomas Niel, discussed the bear case for ACB stock. Despite my advocacy for the (legal) marijuana market, I highly recommend that you read his take. You can never go wrong with more information.
Not only that, Niel has a valid argument. On paper, Aurora stock is levered to the burgeoning medical cannabis market. Additionally, ACB has the strongest international presence: they’re active in 25 countries across five continents.
However, this advantage is racing against time. If management runs out of cash, their investments could quickly sour. In that case, the best move is to avoid Aurora Cannabis stock.
But should you go down that pessimistic road?
Why You Can Still Trust ACB Stock
I might sound like a broken record at this point. Nevertheless, I’m still bullish on ACB stock and the broader weed industry.
First, I completely respect Niel’s point about the cash burn impacting Aurora stock. In some ways, the company is marijuana’s equivalent of Tesla (NASDAQ:TSLA). For years, bearish analysts complained about Tesla’s cash burn despite the tech firm producing some incredibly innovative electric vehicles.
Largely, TSLA shares defied fundamental logic. However, this year was a comeuppance for Tesla. More critically, it appears that Tesla’s recent resurgence will end after a disappointing Q2 earnings report. Stated differently, cash burn matters, and that should initially concern stakeholders of Aurora Cannabis stock.
But here’s where I diverge from my own comparison. No matter how you break it down, Tesla is a normal company. They have access to a wide range of funding options. On the other hand, you cannot say that about ACB stock. Due to both our own federal laws, as well as international protocol, financial institutions are skittish about weed.
Of course, this fear is more than understandable. Thus, I also empathize with those who want to dump Aurora stock. However, I would urge a breather before hitting that sell button.
Because of the volatility in marijuana stocks broadly, you might assume that none of the core fundamentals will turn positively for ACB stock. I don’t think that’s the case. For instance, Hexo (NYSE:HEXO) recently joined the ranks of the New York Stock Exchange. I don’t think that’s going to happen if legal marijuana faces an existential crisis.
Plus, look at the myriad major companies like Constellation Brands (NYSE:STZ) or Altria Group (NYSE:MO) investing billions in this sector. One by one, the alpha dogs are putting skin in this game.
Aurora Making Risky but Smart Decisions
If name-brand organizations are willing to partner with marijuana firms, I don’t see the societal and governmental holdup lasting that much longer. The evidence is all around us. Steadily, the cannabis industry is gaining mainstream credibility. When this process is complete, Aurora is well-positioned to profit handsomely. Obviously, that’s a big plus for Aurora stock.
Finally, let’s add some context to the cash burn. Yes, management is making risky decisions. But to be fair, every decision in marijuana is risky right now. The question is whether those decisions are smart ones.
I have consistently contended that they are. For instance, Aurora’s Whistler Medical Marijuana buyout gives the company access to premium-grade medical cannabis. When low-cost leaders penetrate this market, Aurora has a vital distinguisher: quality, scientifically-sourced products that you can’t get anywhere else.
Management is still making smart decisions. Recently, their partnership with cage-fighting league UFC generated headlines. It might also turn out to be gamechanger.
Obviously, UFC fighters endure substantial pains and injury. If medical cannabis (and specifically, Aurora’s cannabis products) can quantifiably improve these athletes’ quality of life, that will spike interest in the company and the industry.
Of course, the criticism remains that this is a long-term play against a rapidly accelerating cash burn. Still, I think this is a bet worth taking. Underneath the volatility of ACB stock lies profound fundamental drivers.
As of this writing, Josh Enomoto is long HEXO stock.
