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Avoid Aurora Cannabis Stock Until Investor Fears Subside

ACB stock is in a downtrend that it cannot shake off

Aurora Cannabis (NYSE:ACB) can’t seem to catch a break. After rallying to around $6.30 earlier this month, the stock resumed its downtrend, closing Sept. 17 at $5.27. What will it take for Aurora Cannabis stock to shake off its downtrend?

Aurora Cannabis Stock
Source: ElRoi / Shutterstock.com

On Sept. 11, Aurora reported fourth-quarter 2019 results that disappointed investors. Markets did not like the company’s revenue and margin numbers. Revenue rose 52%, adding $44.9 million CAD in the quarter to the $98.9 million CAD total.

But, the average selling price of dried cannabis dropped 30% to $5.58 CAD and the average selling price of cannabis extracts fell 23%. The declines are due to increased sales in the consumer market. Bulk wholesale sales, although having a very attractive margin, also hurt average selling price slightly.

This fall, Aurora will introduce new product formats to the Canadian consumer market. This could widen the company’s addressable market but may also result in lower profitability in the near term.

Retail distribution is still a short-term constraint, as the company’s fiscal 2019 results showed. But a retail infrastructure expansion in 2020 — with physical store openings across Canada — will drive revenue growth.

Higher Output

Kilograms produced rose 12-fold to 29,034 kilograms. Aurora sold 17,793 kilograms, up 10-fold from last year. Operating costs improved but not enough to satisfy investors. Gross margin improved slightly, reaching 58%. ACB stock price will respond favorably if the company demonstrates an ability to keep ahead of its competition. It improved its per-gram cost of production, which gives Aurora plenty of flexibility to expand its business.

The Aurora Sky unit was produced at a cost of around $1 a gram. Continued improvements, while maintaining a high-quality product, will help Aurora operate with extremely healthy margins.

Expansion in the United States, Europe

Aurora recently announced a major partnership in the United States. Along with the UFC, a mixed martial arts organization, Aurora will fund a joint clinical research program that will examine the use of hemp-derived CBD as an effective treatment for pain, inflammation, wound-healing and recovery on MMA athletes. If the study yields positive data, Aurora could form partnerships and collaborative studies with other sports organizations. For now, the UFC deal is a big win for Aurora because the organization has over 300 million fans in over 170 countries.

In Q4, Aurora benefited from stronger European sales. Sales in Germany lagged and will need more attention. Aurora won a contract for supplying a very small amount of cannabis in Italy. Still, getting support from the Italian government is a positive start. And because the European market is quality driven, not price driven, Aurora has a good chance of winning more supply deals in the future.

Risks for ACB Stock

Aurora is a leading cannabis supplier in Canada, but revenue growth did not meet analyst expectations. Even though it reached almost 90,000 registered patients, sales will only improve as patients take advantage of writing off the cost of medical cannabis. Increasing insurance coverage will also lead to higher consumption of its products. So long as customers seek physician care while using medical cannabis, Aurora will benefit from higher sales in the medical market.

After watching ACB stock fall so quickly in recent trading sessions, it is clear that investors are no longer willing to wait for the company to reach positive EBITDA. Yet anyone invested in Aurora stock will need to exercise more patience. The company is currently manufacturing all of its products at commercial scale. As it rolls out its products, it will not sell below costs. So as its market expands, product demand will result in a sustained pricing level that is of high margin for Aurora.

My Takeaway on Aurora Cannabis Stock

Despite analysts expressing disappointment over Aurora’s Q4 numbers, the average price target is still 52.9% above the recent $5.27 closing price (per TipRanks). In the next few days, Aurora stock could trend lower and might even close at new yearly lows. The sentiment is too negative to ignore, so investors should wait for buyers to step in before starting a position.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/avoid-aurora-cannabis-stock-until-investor-fears-subside/.

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