Aurora Cannabis (NYSE:ACB) announced September 4 that it sold its 10.5% stake in Green Organic Dutchman Holdings (OTCMKTS:TGODF) for gross proceeds of CAD $86.5 million or CAD $3 a share. Owners of Aurora Cannabis stock will be pleased to learn the sale resulted in a 50% internal rate of return.
In addition, it still holds warrants to buy another 16,666,667 shares of TGODF that are exercisable at $3 share. With the stock currently trading around $3, it’s going to be a while before ACB could cash in those warrants.
In the meantime, Aurora has more than $40 million in pre-tax profits to put to work. Here’s where I think the owners of ACB stock will get the most bang for their buck.
These Pretzels Are Making Me Thirsty
I couldn’t resist the Seinfeld reference but the one area where Aurora has been slow to the party is in the cannabis-infused drinks market.
Sure, it won’t be able to legally sell these drinks in its Canadian home market until mid-December of this year, but that’s left it with plenty of time to organize a game plan for the drinks market. It’s disappointing that it hasn’t.
Instead, Aurora is going to focus on vape pens and concentrates for its growth beyond the dried flower.
“You’re going to start seeing people shift over from the illicit market, the minute vape pens become available. And we have a head start on that,” Aurora Chief Corporate Officer Cam Battley said in June.
Given the recent health concerns about vaping that have cropped up in 16 U.S. states suggests that the failure to have a backup plan could hurt Aurora in the near term. Long term, I’m sure the vaping issues will get sorted, but there is definitely more investigation to be done.
However, Aurora’s lack of cannabis-infused drinks is a big reason why I’m (pardon the pun) high on both Canopy Growth (NYSE:CGC) and Hexo (NYSE:HEXO), whose Big Alcohol partners bring knowledge and distribution capabilities to the table, making them attractive cannabis investments in my opinion.
Don’t get me wrong. There’s a lot to like about Aurora. Here’s what I said about it in August:
“Aurora Cannabis continues to use its industry-leading size in both Canada and abroad to capture a big part of the global cannabis market. The fact that it doesn’t have a U.S. business plan at the moment doesn’t mean it won’t enter the market in the future.”
“Furthermore, while it doesn’t have a huge strategic partner, if it continues to implement innovative ideas such as cultivating outside, I don’t think it will have a problem attracting a huge strategic investor.”
Why Not Partner With Coke?
Back in 2018, Aurora held talks with Coca-Cola (NYSE:KO) but those seemed to have fizzled out.
However, the fact that it recruited billionaire Nelson Peltz, whose Trian Fund Management has several high-profile consumer goods investments, to help guide the company through its ongoing growth suggests that it might reconsider a partnership with a company such as Coke in the future.
In my opinion, the owners of Aurora Cannabis stock would be well served by the company reconsidering its stance on cannabis-infused drinks. I can say with certainty that my age group (mid-50s) are far more inclined to try THC/CBD drinks or edibles than they are vapes or dried flower.
If you haven’t smoked cigarettes your entire life or for many years, why would you start with weed? You wouldn’t.
The Bottom Line on Aurora Stock
You can’t be all things to all people. That I get. So, it makes sense that Aurora’s focused its efforts on products that have done well in the U.S. states where recreational pot is legal.
However, tastes can change. Few have delivered cannabis-infused drinks that taste good. If Canopy or Hexo can break through that barrier, I’m confident they’ll roll those drinks out across the U.S. as more states and the feds legalize pot.
In the meantime, all Aurora can do is hope that they don’t. A better plan would be to join the party. It’s got 40 million reasons to do so.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.