I’m bullish on the long-term future for Aurora Cannabis (NYSE:ACB). It’s a case I made about a month ago. This was right after ACB stock continued to fall after its fourth-quarter earnings report.
I believe that Aurora is being punished due to unrealistic expectations. The asset bubble of cannabis has popped, and now many investors are overcorrecting to the point where any cannabis stock is seen as doomed to fail.
At the birth of the cannabis industry, its growth projections bowled over investors. Investors poured their hopes and dreams into an emerging market but only now are beginning to see the industry’s strengths and weaknesses.
The entire cannabis industry is now moving into a new phase. Some are calling it Cannabis 2.0. Another way to think about is that most of these established players such as Canopy Growth (NYSE:CGC), Cronos Group (NASDAQ:CRON), Tilray (NASDAQ:TLRY) and Aurora are like teenagers. And like all teenagers, they carry a lot of potential and a fair amount of risk.
Adolescent Marijuana Industry
Parents of teenagers will often follow the advice to trust but verify. In the case of Aurora, investors seem pleased with the Canadian cannabis giant’s commitment to providing quarterly financial reports. The intent of the reports is to provide “continued transparency and disclosure.”
The company’s most recent report contained detailed information about the company’s expansion efforts, which was mostly positive and expected.
What was less clear for investors was what, if any, progress Aurora made on strategic partnerships. Specifically, whether they found a partner to help expand the reach of its CBD-based products in the United States,
In contrast to specific statements surrounding the construction of its production facilities, the company issued a vague statement. It read in part, “…the Aurora team is working to advance several major strategic initiatives in Canada, the United States, and abroad aimed at further strengthening Aurora’s global position.”
Teenagers frequently communicate information on a “need to know” basis. Parents have to balance respect for privacy with their responsibility to ensure the well-being of their child. Investors looking at buying ACB stock have to wonder what the lack of information about a strategic partner means. Does it mean talks are progressing? Or does it mean that there is nothing to report.
In its fourth-quarter earnings report conference call in September, Aurora CEO Terry Booth had suggested that the company had been on a multistate operator review tour and casually mentioned that “probably 90% of my time is dealt on new opportunities.”
Cash Burn and ACB Stock
The reason this is important is that ACB is burning cash, which isn’t good for a company that has yet to be profitable. Particularly when the company has already undertaken one share offering that had a dilutive effect on Aurora stock.
Low cash reserves also make it difficult for Aurora to make any significant investment in the U.S. marijuana market.
One narrative about the cannabis industry is that the pending legalization of cannabis derivatives in Canada will help to unlock the log jam in the supply pipeline. In short, there is plenty of product, but no way to bring it to market.
However, freeing up production is a double-edged sword for Aurora. As the industry’s largest producer, they would stand to lose the most from the price drop that is almost certain to happen.
And what if the market for CBD-based products is not as robust as predicted? At least one analyst thinks that is a distinct possibility.
Either scenario would have a significantly negative impact on Aurora’s road to profitability, and ACB stock.
The Bottom Line on ACB Stock
Because of regulatory delays, the market for CBD derivatives in Canada will not fully open until December. Aurora just closed its fiscal year. This means investors and analysts will have to wait until the company issues its fiscal second-quarter earnings to assess ACB stock using conventional valuation metrics like EBITDA.
If you’re thinking about investing in Aurora stock, there’s a lot to like. As my colleague Luke Lango reported, in the last quarter Aurora Cannabis became the largest Canadian cannabis player in terms of sales and volume. The company is also seeing improved margins, lower cash costs and expanding capacity and distribution.
There’s also ample reason for concern. The reality is that the company, like a teenager, is not yet what it will be, but before you put money into this stock, it might be best to wait for some clarity.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.
