Aurora Cannabis Stock: Pot and the Hype Cycle

ACB stock now has cash to wait out the marijuana market's trough of disillusionment

Technology reporters often use the Gartner (NYSE:IT) Hype Cycle to describe how the market adapts to new technologies.

Aurora Cannabis Stock is Due For a Rebound
Source: ElRoi / Shutterstock.com

In the Hype Cycle, a peak of inflated expectations is followed by a trough of disillusionment, then a gradual slope of enlightenment toward a plateau of productivity.

The measurements of the Hype Cycle are inexact. The trough may be short-lived and the plateau high, as it was with the internet 20 years ago. Or the trough may be very long and the plateau low, as companies like 3D Systems (NYSE:DDD) are finding five years after 3D printing peaked.

Aurora Cannabis (NYSE:ACB) and other marijuana stocks are now in the trough. They peaked almost a year ago. The market has developed more slowly than they anticipated.

The question is whether we’re looking at another internet crash-and-boom, or another 3D printing disaster.

The Pot Bust and ACB Stock

Even at its Sept. 6 opening price of $5.93 per share and a market cap of $5.9 billion, the ACB stock price still reflects great expectations. Trailing year sales are just $166 million. The last year shows more losses ($210 million) than sales.

Yet there is a lot of pessimism among investors. Our Faisal Humayun says it’s still too early to buy. The big growers are still finding it hard to move the product. Aurora alone has 625,000 kilograms of growing capacity per year.

Faisal is not alone. Other analysts also consider Aurora overvalued.

Despite growing moves to legalize marijuana there is still a Wild West aspect to the market. People can die vaping the stuff because they don’t know how to use it. Even if you treat pot the way you do alcohol, there’s still a law enforcement system to ramp up.  The law itself remains a patchwork. It’s still technically classed with heroin on a federal level, but it’s perfectly fine in many states.

The most important asset marijuana companies like Aurora Cannabis would seem to need today is time. Time for the law to settle and for supply and demand in Canada (where pot has been legal for almost a year) to balance. It also needs time for the U.S. market to develop.

Aurora’s Big Move

This brings us to Aurora’s big move.

It sold its holdings in another pot company, Green Organic Dutchman (TSZ:TGOD), at $3 per share, netting over $86 million from over 28 million shares. ACB still holds warrants on over 16 million shares, but the cash is the key.

The cash, along with $149 million in cash and short-term investments on the books in June, buys Aurora time to wait on the market. While rival Canopy Growth (NYSE:CGC) is now down for the year, Aurora stock is up about 10%.

Aurora is next due to announce earnings Sept. 11, with a loss of about $20 million or 2 cents per share expected on revenue of $79 million. Since August marks the fourth quarter of Aurora’s fiscal year, it means earnings are down year-over-year, but revenue is up 432%.

Bottom Line on Aurora Cannabis Stock

Financial sustainability is the name of the game as marijuana growers navigate the trough of disillusionment. The short-term looks dark, but as Luke Lango observes, the future looks bright.

Aurora now has cash to burn through the market’s night and stable management under co-founder Terry Booth. Rival Canopy has jettisoned its founding managers under the guidance of liquor company Constellation Brands (NYSE:STZ).

To those who like pot stocks this makes Aurora a buy.  Were I a speculator I might throw a few Loonies at it. But with my retirement money on the line I’ll leave that to younger folks.

Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/aurora-cannabis-stock-pot-and-the-hype-cycle/.

©2019 InvestorPlace Media, LLC