Aurora Cannabis (NYSE:ACB) stock now trades at its lowest point since soon after the hype about marijuana stock began in 2017. This has created a debate among analysts as to whether Aurora Cannabis stock has become a bargain or if it has further to fall.
However, sustained profitability will not come for at least a few more quarters. Moreover, the overall industry looks poised to consolidate as unexpected challenges could force out smaller players. Until it can more closely resemble companies in similar, more established industries, I see few growth prospects for ACB stock in the near term.
Aurora Stock Still Not a Bargain
In previous articles, I have long panned ACB stock. However, investors need to also separate Aurora Cannabis stock and Aurora Cannabis. Aurora remains the world’s largest cannabis producer, growing more weed than market leader Canopy Growth (NYSE:CGC). This and its financial position should help it survive an industry shakeout that may have already started.
However, it built much of its success on the back of ACB stock. Aurora’s share growth from 129 million in 2016 to over 1 billion today provided the company with much of its needed funding. However, it is also the reason I have discouraged traders from buying ACB stock. This and a selloff in marijuana stocks in general have hammered ACB. It has now fallen by two-thirds from its 52-week high of $12.52 per share.
Aurora stock trades at around $4.11 per share at the time of this writing. With it trading below the $5 per share range, many will think it has become a bargain. Admittedly, it has seen a decline in several valuation metrics. The price-to-sales (PS) ratio has fallen to 22.6, and it trades at only 1.28-times book value.
However, 22.6 is not a cheap PS ratio. Moreover, I think traders need to consider the company’s massive dilution. Had an eight-fold increase in shares outstanding not occurred, we might have a stock above $30 per share instead of below $5 per share.
Industry Challenges Could Hurt ACB Further
Investors must also consider challenges outside of Aurora’s control. First, the industry faces a supply glut. Although the selling of edibles, beverages, oils, and other derivatives will help work down that supply, pricing for dried cannabis could easily fall further. This glut may create concerns for holders of ACB stock given the money invested in becoming the world’s largest producer.
Secondly, studies in recent months have called into question the benefits of cannabis. In May, Harvard University researchers concluded that legal marijuana reduces opioid prescriptions. However, a study by the Proceedings of the National Academy of Sciences found that the association of medical cannabis laws with deaths related to opioids has reversed over time.
Moreover, the Food and Drug Administration (FDA) has issued warning letters related to cannabidiol (CBD) products. The FDA alleges some do not contain the CBD advertised. The FDA also stresses that such substances have not received approval for the treatment or prevention of any particular condition.
Given that GW Pharmaceuticals (NASDAQ:GWPH) has received FDA approval for cannabis-based treatments, I do not think advocates of medical cannabis should lose all hope. However, these studies and warnings could dash investor hopes on medical marijuana significantly.
Although I see an eventual recovery for ACB stock, I do not think a stock price of just over $4 per share helps the equity. The decline in marijuana stocks will likely trigger an industry consolidation. I believe the company’s fundamentals and market position will save Aurora Cannabis from extinction. However, the catalysts that will revive Aurora stock will not come soon.
What ACB Stock Needs to Succeed
I stick by my previous argument that ACB stock will have to become the Altria (NYSE:MO) of marijuana to succeed long term. What I mean by that is that it must become a profitable, dividend-paying producer and seller of cannabis.
First, a few things have to happen. Our own Dana Blankenhorn, who has also compared Aurora to Altria, touched on some of these.
First, cannabis must become fully legal in the U.S., an event Mr. Blankenhorn predicts will happen in 2021. Secondly, Aurora Cannabis stock must turn a profit. ACB beat expectations by breaking even in the previous quarter. Also, analysts believe the company will break even in the next fiscal year. These growing profits should eventually put ACB on a path to initiate the dividends that will attract income investors in time.
ACB stock will eventually recover. However, I think that comeback only happens when Aurora can earn profits and operate in the U.S. with few limitations.
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.