Aurora Cannabis (NYSE:ACB) stock will report its earnings on Thursday before the opening bell. Investors will closely watch Aurora Cannabis stock for guidance amid its decline and that of its peers.
Yes, some of the stock decreases came when peers such as Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) issued their reports. Still, ACB stock faces its own test. Although Aurora should continue to lead the world in marijuana production, size alone will not make ACB a buy going into earnings.
Q2 Expectations and ACB Stock
For the second quarter, analysts expect a loss of five Canadian cents (3.8 cents) per share. The company reported losses of 15 Canadian cents per share in the same quarter last year. However, investors should note that Aurora has missed estimates in three of the previous four quarterly reports.
They also predicted revenues of C$258.95 million ($196.71 million). If this holds, it will represent a 369.1% increase in revenues year-over-year. ACB brought in revenues of C$55.2 million in the second quarter of 2018.
Despite the massive increase in revenue, the only likely source of profit for Aurora Cannabis will come from stock trading. The company recently sold its 10.5% stake in The Green Organic Dutchman Holdings (OTCMKTS:TGODF).
This nets the company $86.5 million. As our own James Brumley states, the deal could buy C$86.5 million ($65.71 million) worth of time to generate profits. It could also help with debt relief as the company has to pay back C$230 million worth of debt on March 9, 2020.
Outstanding Shares and Aurora Cannabis Stock
Another key component that should garner investor interest involves the shares outstanding on Aurora Cannabis stock. In previous articles, I have remained bearish on ACB stock for the massive amount of dilution. About 129 million shares existed in 2016. Today that figure now exceeds one billion.
In a sense, I do not blame the company for diluting the stock. The market’s toleration for high multiples seems to have fallen. Despite an ACB stock price of around $6 per share, the equity still trades at about 43.7 times sales.
While Aurora continues to lose money, it makes sense from a company perspective to issue more shares. However, with that level of dilution, it leaves investors with no good reason to pay nearly 44 times sales for the stock.
Other dangers for Aurora Cannabis Stock
This situation could also lead to something unthinkable for a world leader in marijuana production—a reverse stock split. The average price-to-sales (PS) ratio for the S&P 500 stands at 1.53. Even if ACB stock fell to a PS ratio of 4.37 under current revenue figures, that would take ACB to about 60 cents per share.
A reverse split means little in a financial sense, and I believe revenue growth will reduce the PS ratio over time. Still, it would represent a huge psychological blow if it needed to make such a move to escape penny stock status.
James Brumley makes another critical point. Companies such as sit on billions in goodwill from various acquisitions. Aurora itself paid C$3.2 billion ($2.43 billion) to purchase MedReLeaf. A forced write-down of this purchase and comparable takeovers by peers could hurt stocks across the industry. This could have also played a role in Aurora’s sale of TGODF stock.
Final thoughts on ACB stock
Under current conditions, the company earnings report will likely leave investors with little reason to own Aurora Cannabis stock. Aurora Cannabis remains a world leader in the production of marijuana. Even if the company falls short of earnings estimates again, I see little that should threaten this leadership change.
However, investors need to separate Aurora Cannabis from Aurora Cannabis stock. Given the elevated multiple, Aurora has supported itself and funded acquisitions in large measure from massive stock dilution. Despite the proceeds from selling its stake in the Green Organic Dutchman, the company still needs cash to fund operations and pay debts. As long as this practice continues, I see little reason to own ACB stock.
As I have stated before, profiting from Aurora Cannabis stock long term will only happen when the company transforms itself. When it becomes profitable and pays dividends like Altria (NYSE:MO), investors can more reliably earn positive returns from the Aurora story.
Unfortunately, today’s Aurora Cannabis could easily face write-downs and possible a reverse stock split. With continuing losses, stock dilution, and earnings misses, investors have little incentive to pay almost 44 times sales for such an equity, before or after the earnings release.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.