The selling pressure continues on Aurora Cannabis (NYSE:ACB) stock. Aurora Cannabis, at Friday’s close of $5.64, has fallen 44% from March highs. ACB stock now trades at a seven-month low, with most of its 2019 gains wiped out.What’s interesting — and, for ACB shareholders, frustrating — is that Aurora Cannabis seems to have had a good month. The company delivered upbeat preliminary results for its June quarter, and appears to have improved its balance sheet.
So far, those two pieces of good news have done little to move investors to do anything but sell. That response from the market admittedly suggests ACB stock might be an interesting contrarian play from a long-term perspective. But it also implies that sentiment toward cannabis is such that ACB stock — and the entire pot sector — may have further to fall in the meantime.
ACB Stock Gains (Briefly) on Preliminary Q4 Earnings
It’s difficult to see preliminary fourth-quarter earnings from Aurora Cannabis as anything but good news. Aurora estimates revenue will come in at C$100-$107 million, a 57%-64% increase over third quarter levels. Net cannabis sales are guided to C$90-$95 million, suggesting solid organic growth. Production is aimed at the high end of a previous 25,000-30,000 kg range.
In terms of profitability, the news might be a bit more mixed. Aurora wrote that “the company continues to track toward positive adjusted EBITDA, and in particular adjusted EBITDA from cannabis operations.” That’s not the same, however, as saying the company will be profitable, even on an EBITDA basis.
Still, this looks like a solid report. That’s particularly true in the context of disappointing results from industry leader Canopy Growth (NYSE:CGC). Canopy, and the sector, badly needed a strong earnings report. Instead, its sales fell quarter-over-quarter. In the wake of the report, Bloomberg cited one analyst who estimated that Canopy had lost its Canadian market share lead to Aurora.
Meanwhile, Aurora seems set to join Aphria (NYSE:APHA) as cannabis producers heading toward profitability. As a result, the preliminary release boosted ACB stock, which rose 10.3% after the preliminary earnings were announced. The gains were erased over the next six sessions.
An Upsized Credit Facility
The following week, perhaps with some help from the strong report, Aurora Cannabis upsized its credit facility. The company added C$160 million in availability to what had been a C$200 million facility.
This, too, looks like good news. As I detailed last month, Aurora Cannabis has a convertible bond maturing in March. The declines in Aurora Cannabis stock mean that debt almost certainly will be paid in cash, not shares.
The problem was that even with C$390 million in cash on the balance sheet, Aurora Cannabis was unlikely to be able to repay that bond. A steadily increasing amount of that cash was to be held for payments on the existing credit facility. Free cash flow almost certainly will remain negative through early next year.
As such, investors fretted that the company would issue more stock to raise the necessary cash. That would be a problem for a company already facing concerns about dilution.
The larger credit facility seems to solve that problem. Aurora can tap the incremental borrowing capacity to repay the convertibles in March. It can then drive free cash flow to repay the facility, which matures in August 2021 — or extend that maturity to fund external acquisitions or internal investments.
Why Has ACB Stock Declined?
And yet ACB stock has continued to fall. One reason is sentiment toward the sector. As The Motley Fool noted this week, 10 pot stocks have lost a total of US$21 billion in market value in just four months. That includes other well-known names such as Cronos Group (NASDAQ:CRON) and Tilray (NASDAQ:TLRY). Almost every cannabis stock has taken a hit as of late.
There are company-specific factors at play as well. Oversupply in Canada and ensuing pricing pressure remain a significant risk. In that context, huge revenue and production growth might not be considered good news from some investors. It’s a short-term positive but a long-term negative. Aurora is contributing to a market heading for a crash, or something close.
Meanwhile, Aurora’s balance sheet and dilution questions aren’t exactly fixed by the larger facility. The company closed the third quarter with C$390 million in cash. It has to repay C$230 million in March. It has already drawn C$144 million on its revolver. Free cash flow is likely to be negative in Q4, adding to that pressure.
So Aurora’s larger facility simply kicks the proverbial can down the road by about 17 months. Meanwhile, another convertible offering matures in 2024.
Per the Q3 financial statements, that US$345 million (C$459 million) bond can be repaid at maturity in shares, not cash. Starting in 2022, Aurora Cannabis can redeem the bonds if the trading price (for the NYSE listing) of Aurora Cannabis stock averages $9.40 for 20 trading days.
If that doesn’t happen, however, Aurora would have to issue another US$345 million in stock in 2024. With investors already concerned with the share count balloon to over 1 billion, the lower ACB stock price means more dilution could be on the way.
Aurora Cannabis Stock a Falling Knife
The catch for Aurora Cannabis right now is that even good news can be spun as bad news. The trading in Aurora Cannabis stock suggests that’s exactly what is happening.
That said, the declines do present an opportunity for cannabis bulls who see those concerns as somewhat overwrought. While debt and dilution are a concern, the credit facility move does give Aurora Cannabis more time. And the willingness of banks to lend against Aurora’s assets is, in some way, a vote of confidence.
Few, if any, companies have a greater potential global reach. Rivals like Canopy and Cronos don’t seem to be performing quite as well. For cannabis optimists, ACB stock might look very tempting. But the question at this point might be just how many of those optimists are left.
As of this writing, Vince Martin has no positions in any securities mentioned.