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Aurora Cannabis Shareholders Aren’t Happy

ACB stock shareholders should be concerned about the valuation of the company

Aurora Cannabis (NYSE:ACB) is a Canadian-based marijuana grower. ACB stock trades on the NYSE. Like most other companies in this industry, the company has disappointed share holders. ACB shares have lost about 40% of their value since just this past March.

What Aurora Wants You to Know

Source: Shutterstock
Aurora focuses on nine different Key Performance Metrics to evaluate itself and believes that they illustrate a strong performance.

Revenue is the first metric and the company divides it into three segments: Consumer, Medical, and International. All three of these segments saw increases versus the third-quarter of 2018. Consumer was up 37% to $29.6 million and Medical grew 8% to $25.1 million. International revenue was $4 million, an increase of 38%.

The fourth and fifth metrics are the average net selling price per gram and the cash cost to produce a gram. The selling price was down 6% to $6.40, but the cost to produce a gram fell by 26% to $1.42.

Gross margin on cannabis net revenue and SG&A costs are the sixth and seventh metrics. Gross margins grew by 1% and SG&A costs were also up by 1%.

The company also looks at kilograms produced and the amount of active registered patients. The 15,590 kilograms that were produced is a 99% increase over Q3 2018, and the number of active registered patients grew by 5% to 77,136.59

What You Should Know About ACB Stock

This all sounds fine and dandy, but ACB stock has not acted well and it will probably continue to be under pressure in the near-term. I would not own this stock, but if I did, my biggest concern would be the large amount of goodwill and intangible assets that the company claims as part of its valuation.

A look at Aurora’s most recent balance sheet shows that the company has $729 million in goodwill and $259 of intangible assets. This is $988 million. The total value of the assets of the company is $1,910 billion. That means that goodwill and intangibles are 50% of the valuation. To me, that is a major red flag.

Goodwill essentially means the company’s reputation. For example, suppose the assets of a company, like the equipment and property, are worth $100 and the company believes that its reputation is worth $20. If someone else was to buy this company they would need to pay $120. The buyer would list the $20 it paid for the company’s reputation as a goodwill asset. The problem is that it is really hard, if not impossible, to value a company’s reputation and other intangible assets.

If management overpays for a company, this overpayment will be considered an asset even though it really isn’t one. This value will eventually be lost.

The reason why Aurora Cannabis has so much in goodwill and intangible assets is because they have made numerous acquisitions over the past few years. In my opinion, ACB probably overpaid for many of these acquisitions. Because of this I believe that the goodwill and intangible valuations are way too high. Eventually it will need to be revalued, which will in turn make the ACB stock price drop.

To put this into perspective, consider that HEXO (NYSE:HEXO) and Tilray (NASDAQ:TLRY), two other large growers, have no goodwill and only a fractional amount of other intangible assets.

What’s Next for Aurora Cannabis Stock?

ACG has been trending lower since hitting resistance at the $7 level two weeks ago. There is resistance at this level because it was supported from March through July. Support levels become resistance levels because after the level is broken, those who bought it are looking at a loss. They tell themselves that is the stock rallied back up to the level they will sell it and get out of the position at breakeven. This supply of the stock is what causes the  resistance.

If the stock continues to trade lower, it may find support around the $5 level. This is where the lows were in December and January.

At the time of this writing Mark Putrino did not hold any positions in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/08/aurora-cannabis-shareholders-arent-happy/.

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