Should Investors Buy Aurora Cannabis Stock At Current Levels?

Since mid-March, many cannabis stocks, including Canada’s Aurora Cannabis (NYSE:ACB), have fallen from grace. Earlier in July, ACB stock was downgraded to neutral from its previous buy rating. Analysts are expressing concerns over its spending levels and its potential need for funding in the coming quarters. The ACB stock price is now hovering around $5.80, close to January’s lows in the $5 range.

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There is a wide range of issues affecting the cannabis industry. It is likely that the rich valuations in this commodity-based consumer market may take a further hit in the coming months. At present, Aurora Cannabis is Canada’s largest producer, which gives the company certain economies of scale.

Understandably investors are wondering what may be next for ACB stock given the recent decline in the price. Let’s now look at the company’s fundamentals as well as the stock price.

Medical Cannabis Is Important for ACB Stock

More than 260 million adults worldwide consume cannabis at least once per year. Collectively they spend $344 billion annually, according to the cannabis research firm New Frontier Data.

Aurora Cannabis, which aims to capture an important part of this growth, has three key target markets:

  • Canadian consumer (i.e., retail recreational)
  • Canadian medical
  • International medical

So far in 2019, Aurora Cannabis has achieved more recreational marijuana sales than medical cannabis revenue. However, the two segments are very close, split almost 50-50. In general, of these three areas, Canadian retail recreational is the most important one for the industry. Similarly, in the United States, only 20% of sales come from the medical side. ACB stock is unique in its strength in the medical market.

ACB’s latest fiscal 2019 third-quarter earnings report from May showed a 37% revenue increase in the Canadian consumer section. Canadian medical revenue was up 8% and international medical revenue was up 40%.

Many analysts highlight the importance of the medical cannabis markets for ACB stock. The medical marijuana market operates with a higher margin than its retail recreational counterpart.

Several analysts have also praised ACB’s continued operational progress, including diversified geographies into Europe and medical sales with higher margins. The company has operations in over two dozen countries.

However, it will probably be several quarters before investments in medical marijuana as well as in global markets pay off and turn into further profits.

Headwinds That May Affect ACB Stock

Aurora’s Q3 fiscal 2019 results disappointed analysts. Despite the 367% year-over-year revenue growth, ACB missed analyst estimates by a wide margin. On Aug. 6, ACB stock issued a press release with a corporate outlook. Many investors were quite concerned that the producer did not touch upon profits, earnings or cash flow in its trading update.

Like many other cannabis producers — such as Canopy Growth (NYSE:CGC) or Tilray (NASDAQ:TLRY)  — ACB is not able to convert the exponential revenue growth into real profits. Aurora Cannabis said it lost $160.1 million CAD ($121.8 million), or 16 cents per share.

In its fiscal first quarter of 2020, Aurora will have to pay a $230 million CAD convertible debt, which is currently out the money. In other words, Aurora Cannabis will likely pay this debt in cash unless the ACB share price rallies in a few months.

InvestorPlace readers may remember that Tesla (NASDAQ:TSLA) also had a similar convertible bond payment earlier in March. That payment has triggered a host of cash flow issues for the auto maker. Thus, unless Aurora Cannabis tightens up its financials, investors may not be too forgiving.

Recent industry developments in Canada have also put many investors on alert: Health Canada, the national regulator north of the border, has — due to “unauthorized activities” — revoked both the producer and the dealer licenses of Canada-based cannabis producer Agrima Botanicals, which has been under creditor protection for several months.

Again in July, cannabis sales of another Canadian company, CannTrust Holdings (NYSE:CTST), got put on hold by Health Canada for unlicensed growing. In other words, for the first time since the legalization of pot in Canada, the issues of clarity, compliance and transparency have hit the headlines in a matter of few weeks.

Could these developments regarding non-compliance come to haunt other shares, such as ACB stock?

Aurora Cannabis Stock’s Technical Charts Are Weak

Since listing on the New York Stock Exchange in October, ACB stock has rewarded investors richly. So far in 2019, Aurora Cannabis, the producer powerhouse, is up more than 8%.

Yet, investors in the cannabis sector are also aware of how volatile the price of Aurora Cannabis stock and its peers can be. After starting 2019 around $5, on March the stock saw an intra-day high of $10.32. However, marijuana stock investors haven’t been very bullish on the industry in recent months.

Since mid-March, there has been selling pressure on ACB stock. The mixed earnings results for fiscal Q3 2019 have put further pressure on the price of Aurora Cannabis shares and other weed stocks. On May 31, it finished the month at $7.59. Following a choppy June and July, so far August has also been a tough month for ACB stock.

The downtrend is a stark reminder that ACB’s all-time high of $12.52 in October 2018 may not be tested again any time soon. Many investors are now wondering if the bears may possibly push the shares below $5.50.

ACB stock’s short-term technical chart looks weak, pointing to the possibility for more downside around the corner. Expect nearer-term trading to be choppy at best, possibly until the next earnings announcement date in September.

Later in the year, if you still believe in the bull case for Aurora Cannabis stock, you might consider waiting for a better time to get long, such as around $5.00.

Short Interest and ACB Stock

As part of short-term sentiment analysis, investors may also monitor the extent to which stocks are shorted. In other words, they follow the ratio of short positions that are open and yet to be covered. Two investors may look at the same data and have differing views. I tend to use the number as a contrarian indicator.

For example, if more than 20% of a stock’s float (available shares) are shorted, then even a small rise in its price could actually become a powerful short squeeze and propel the stock much higher.

At this point, 11% of ACB’s shares are shorted. So while there are plenty of traders who have shorted ACB stock, not enough shares of Aurora Cannabis are being shorted to set the stage for a massive short-squeeze rally. On the contrary, the current level of short-selling in ACB stock may be enough to put further selling pressure on the shares.

Our readers may want to compare this number to the short float on other companies.

The Bottom Line on ACB Stock

Upcoming earnings reports from ACB as well as its peers will be important for the industry, as not everyone is convinced that Canadian recreational pot sales will remain strong. If Canadian weed demand softens, ACB’s revenue would also be hit.

If there is any broader market weakness in Canadian stocks — say due to market worries over the U.S.-China trade war or because of a general weakness due to disappointing earnings — Aurora Cannabis share price may also be adversely affected further.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/should-investors-buy-aurora-cannabis-stock-at-current-levels/.

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