Here’s Why Aurora Cannabis Stock Stumbled

ACB stock plunged after announcing fourth-quarter results

Among investment sectors, few have incurred the kind of volatility as legal marijuana. Major Canadian cannabis players like Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC) and Cronos (NASDAQ:CRON) forwarded disappointing earnings reports. Thus, with Aurora Cannabis (NYSE:ACB) set to launch its fiscal fourth-quarter results, many had hopeful eyes on Aurora Cannabis stock.

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Unfortunately, those expectations were badly misplaced. Aurora disclosed its Q4 numbers after Wednesday’s close, and Wall Street did not react kindly. On the top line, the medical-cannabis specialist rang up $98.9 million CAD, which represented a 52% lift from the prior quarter. However, Aurora management forecasted Q4 sales to come in between $100 million CAD to $107 million CAD. As a result of the revenue miss, the ACB stock price tanked in after-hours trading.

After a night’s rest to digest the news, the Street immediately hit the “sell” button. Due to the mini-panic, Aurora Cannabis stock closed Sept. 12 below the $6 level. From a technical perspective, this was an unfortunate development. ACB stock was finally looking interesting since the beginning of this month. Now, questions have sprouted about this once-vaunted cannabis player.

Another factor that has raised concerns among investors is Aurora’s international business. One of the biggest investment arguments for Aurora Cannabis stock is its international footprint, the biggest in the sector. However, most of the company’s financial performance comes from its local Canadian market.

But in Europe, for example, the company generated $4.5 million CAD in medical-cannabis sales. That’s up 12%, a very modest rate compared to its Canadian growth rate. With management continuing to make high-dollar investments, can ACB stock survive?

Aurora Cannabis Stock Tanked for Understandable Reasons

Heading into the Q4 earnings report, the ACB stock price had robust technical momentum. At the same time, on a fundamental basis, the organization was going up against a wall of pressure.

Primarily, every other major cannabis player had failed to impress the Street. Unlike in late 2017, Aurora Cannabis stock and its ilk did not benefit from the honeymoon effect. Cannabis investments no longer moved on compelling narratives, such as Canada legalizing recreational weed. Instead, prospective buyers were placing extra attention on the “boring” stuff, like fiscal sustainability.

That created a major problem. Let me be blunt: There are two reasons why mainstream financial institutions take a pass on cannabis-related businesses. First, legal uncertainties — and political controversies — surround the sector. Second, the financials for most of these names are rough.

And that’s been the story for Aurora Cannabis stock and its peers throughout this year. Undoubtedly, Aurora and the rest of the marijuana market offer tremendous potential in their narratives. For example, if the U.S. legalizes marijuana, it changes the calculus for ACB stock.

But before the narrative comes the reality. While Aurora’s revenue growth has been impressive on a mathematical scale, so has its debt load. Sure, companies like Aurora have healthy cash balances, in part due to strategic partnerships. Yet the concern is this: Aurora cannot keep spending without turning at least some of its narrative potential into hard results.

Ultimately, I think that’s why the Street was so disappointed. The cannabis market has stepped out of the honeymoon phase and into the “show me” phase. In other words, investors are tired of hearing bedtime stories. Instead, they want some evidence that these tales are based on facts.

If you looked at the Q4 results, you really didn’t get that impression from Aurora Cannabis stock.

Should You Dump ACB Stock?

Part of being a good investor is knowing when to give up. Unlike sports, there’s no such thing as a moral victory in the markets. Either you’re making money or you’re not.

Under this framework, Aurora Cannabis stock looks like a candidate to sell. And I don’t blame you if you decide to go that route.

That said, here’s the plain truth about ACB stock: No matter what anybody says about the financials, the play here has always been the narrative. When companies in established industries show the kind of quarterly results that Aurora does, you should jettison immediately — we know approximately the upper boundaries of traditional industries.

But we really don’t know anything about marijuana. Maybe the segment peaked in Ottawa, and everybody else doesn’t know it yet. Or, the U.S. and other regions will start opening the legalization door.

Clearly, Aurora Cannabis is banking aggressively on this latter possibility. Whether you believe in the same will determine how you approach ACB stock.

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


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/fiscal-focus-negatively-impacted-aurora-cannabis-stock/.

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