It’s been a terrible week for those holding Aurora Cannabis (NYSE:ACB) in their portfolios. ACB stock fell more than 8% in just 24 hours on Wednesday as investors started to question whether or not the stock was overvalued.
With the stock trading at 50% of its 52-week high, it might look like a bargain, but ACB stock’s uncertain future and worrying risk level keeps it from being a buy.
Much of the concern regarding ABC stock stemmed from the fact that Piper Jaffray initiated coverage on the company with a neutral rating and a $7.00 price target. As usual, the unexpected negative press took ACB stock markedly lower despite the fact that the majority of analysts covering Aurora Cannabis actually give the stock a Buy or Overweight rating.
According to the Wall Street Journal, of the 17 analysts covering ACB, 59% are positive on the stock, 35% have given it a Hold rating and one lone analyst recommends selling. The average price target comes in at $12.57 which suggests upside potential of more than 50%. Even the Piper Jaffray target predicts a 13% increase from where the stock is trading today.
So, before you take Piper Jaffray analyst Michael Lavery’s word as gospel- keep in mind that he’s actually in the minority when it comes to ACB stock.
This kind of overreaction often presents an excellent buying opportunity and if you’re an ACB believer, then now makes for a good entry point. However, I’ve never been a fan of Aurora Cannabis and I agree with some of the faults that Lavery pointed out.
Jeffray Rating Explained
In order to come up with a rating on ACB, Lavery used a five-factor checklist – balance sheet, valuation, Canadian markets, US markets and European Markets. Aurora could receive up to two points in each category for a potential score of 10 total.
ACB came out with just two points out of 10- one for the firm’s EU market positioning and one for the company’s balance sheet strength.
ACB scored a zero in Canadian markets because of oversupply worries there. In the U.S. ACB also came up empty because the firm hasn’t shared any concrete plans with investors regarding entry into the CBD market and its strategy for the THC market in the U.S. is murky at best. Because Aurora has been hyped up over the past year, the firm also received a score of zero in the valuation category.
Future Built on Uncertainty
In short, I think Lavery has a point. What does the road ahead look like for ACB? Back in January, I pointed out that Aurora Cannabis was lacking a big-name brand partner that could help the firm grow in the U.S. as the market develops. However, although ACB has been acquiring a number of smaller cannabis companies, the firm has yet to partner with anyone larger with better access to consumer markets.
Since then, Aurora has taken on Nelson Peltz as a strategic advisor. According to Barron’s, Peltz was brought in to “explore potential partnerships that would be the optimal strategic fit for successful entry into each one of Aurora’s contemplated market segments.” But so far, we’ve heard nothing but crickets as for as a big-brand partnership.
Financial Stability
Although Lavery did dole out a point for Aurora Cannabis’ balance sheet strength, I think he was being generous. While operating in a relatively new industry calls for higher debt obligations, ACB’s acquisition strategy has required the firm sink itself into a mountain of debt.
Not only did the firm have to issue convertible debt in order to fund its future growth, but as The Motley Fool’s Sean Williams pointed out, ACB has paid a staggering amount of “goodwill” to its acquisition targets.
The 15 acquisitions that the company made over the past three years loaded the company’s books with $2.39 billion in goodwill. That’s 57% of the company’s total assets. To put that into perspective, the majority of ACB’s competitors’ goodwill sits at 20% or less of their total assets.
The Bottom Line on ACB Stock
ACB stock is a very risky bet, even after it’s major comedown. The company has been overhyped and when you look at its actual long-term potential and financial stability, the stock looks like a dud.
Unless Aurora Cannabis is able to ink an impressive partnership with a major brand, I’d stay far, far away.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
