Aurora Cannabis (NYSE:ACB) stock has tumbled in line with the rest of the cannabis space. Shares fell from a high of $7.20 on Aug. 6 to $5.67 at the close Aug. 15. With negative sentiment in the marijuana space accelerating, what’s the next move with ACB stock?
Shares continue to trade at a valuation premium to peers Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY). While the company has not experienced issues such as the scandal brewing at CannTrust (NYSE:CTST), little has changed on the catalyst front since my last article.
With this in mind, what’s the call on Aurora Cannabis stock? Read on to see whether ACB is a bargain (or a falling knife), at the current trading price.
A Closer Look at Aurora Cannabis
On Aug. 6, the company released an update regarding the quarter ending June 30, 2019. The company anticipates net revenue of between $100-$107 million for the quarter, up from $65.1 million for the prior quarter. Aurora Cannabis reiterates they are getting closer to positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). I take this projection with a grain of salt, given their continued cash burn.
With their focus on the medical market, Aurora Cannabis seems like a safer play. While its peers focus on the recreational market, the company is smartly pursuing more prosaic business lines. Coupled with their focus on geographic diversification, the company stands a greater chance of achieving profitability. But is the company getting ahead of itself? Despite expected quarterly sales of only 25,000-30,000 kg., the company is growing funded capacity from 150,000 kg/year to 625,000 kg/year.
Aurora Cannabis has yet to make moves into the American market. They have not yet found a strategic partner (despite hiring Nelson Peltz to do so). Perhaps it’s a smart move to take their time. Given that Canopy Growth’s partnership with Constellation Brands (NYSE:STZ) is highly dilutive, teaming up with a big consumer goods company may not be the best option for Aurora shareholders.
Aurora Cannabis remains a work-in-progress. But in terms of valuation, is ACB stock a buy? Let’s see how the valuation of Aurora Cannabis stock stacks up to peers.
ACB Stock Still Overvalued
On an Enterprise Value/Sales (EV/Sales) basis, ACB stock trades at a premium to Canopy Growth. Aurora Cannabis stock has an EV/Sales ratio of 52.4, compared to 50.4 for CGC. Tilray has an EV/Sales ratio of 42.8. ACB stock does trade at a valuation discount to Cronos (NASDAQ:CRON). Cronos has an EV/Sales ratio of 165.3. But in the case of Cronos, the company’s partnership with Altria Group (NYSE:MO) continues to help support the share price.
ACB stock is not only overvalued relative to Canopy and Tilray. Despite a trailing twelve month negative EBITDA of $154 million, the company has a market cap of $6.14 billion. Investor expectations continue to keep Aurora Cannabis at an inflated valuation. This means much of the potential upside remains priced into the stock.
Additional downside could be in the cards for Aurora Cannabis stock. Making a pivot from dilutive capital raises, the company recently announced it boosted its secured credit facility from C$200 million to C$360 million. But replacing dilutive equity with leverage amplifies the company’s risk. With continued cash burn, ACB stock could face liquidity issues, especially as we get closer to the conversion date of its convertible debt. As I mentioned back in July, the company will either have to convert the debt into ACB stock (which would be dilutive), or raise capital once the notes mature. Either way, Aurora Cannabis stock could fall further.
Bottom Line: Continue to Avoid Aurora Cannabis
The legal marijuana space continues to be speculative. Investors enjoyed the ride for the past few years, but now it seems they are heading for the exits. With its focus on the less glamorous aspects of the legal pot trade, Aurora Cannabis has potential. By chasing opportunities globally, they are less dependent on specific jurisdictions to sustain growth. With the company yet to make a move into the United States, Aurora could make opportune acquisitions of U.S.-focused cannabis companies.
For the time being, the risks with ACB stock do not match up with the potential opportunity. With the company’s heavy use of convertible debt, material downside risk remains. With the investor exodus just beginning, stay on the sidelines while the dust clears. ACB stock could be a screaming by at a fire sale price. For now, Aurora Cannabis stock remains a long shot bet.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
