Aurora Cannabis (NYSE:ACB) has had a rough few weeks. The company reported earnings that disappointed shareholders and as a result the price of ACB stock has dropped by about 20% since the Sept. 12 report. That compares to a 13% decline in ETFMG Alternative Harvest ETF (NYSEArca:MJ).
In a move that I believe was very unusual, the actual earnings were not reported in the earnings statement. To find them, you would need to look in the company’s complete financial statements. I do not understand the Aurora Cannabis’ logic for doing this, because as an investor it makes me think that they are trying to hide something. As it turns out, the earnings were essentially flat, versus a profit of CAD 17 cents (13 cents) last year for the same period.
Furthermore, the managements commentary was not very assuring. Earlier this year management said the company was on its way to having a positive EBITDA this year. But in August they hedged when they said the company would eventually have positive EBITDA, but would not say when this was expected to happen.
Goodwill is Enormous
Another issue that is pressuring this company is the extremely high amount of goodwill and intangible assets Aurora Cannabis counts as part of its valuation. Goodwill is essentially reputation. For example, suppose there is a company that has assets of $100. If you sold all of the equipment, property and other tangible assets you could get $100.
Now suppose that someone buys this company for $150. They believe that the company’s reputations is worth the extra $50. Now this $50 becomes part of this company’s value as goodwill. So in other words, if one company overpays for another company, that overpayment will become part of the valuation of the acquiring company.
Aurora has $3.9 billion of goodwill and intangible assets listed on its balance sheet. The company lists the total amount of its assets at $5.5 billion. This means that goodwill and intangible assets are 70% of its overall valuation! This is an extremely high number. Remember, goodwill only exists on paper and in the minds of the management.
As a result of all of these bearish dynamics, the brokerage firm Stifel Nicolaus put a sell rating on ACB stock. The firm also suggested that Aurora will need to find a strategic partner to continue its operations. This is a nice way of saying that they are going to need to borrow or raise a significant amount of money in the near future. If not, its days may be numbered.
ACB stock has many issues putting downside pressure on it and I don’t expect that to change anytime soon.
What’s Next for Aurora Cannabis Stock?
ACB stock is trading around a very important level. The levels around $5 very where the shares found a bottom during last December’s selloff. There may be a rebound because it is oversold. If it does break we could see another big mover lower. Considering the extreme weakness that is occurring in the stocks of other cannabis growers this would not be surprising.
As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.
