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Will Federal Legalization Occur in Time to Save Aurora Cannabis Stock?

There are two questions investors should ask regarding Aurora Cannabis (NYSE:ACB), and indeed, any cannabis stock. How long must investors wait before marijuana is treated like tobacco? And does your target company have enough cash to get there?

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These are the questions I started to ask last month, when I wrote about “Pot and the Hype Cycle.” New technologies always go through a hype cycle — great excitement followed by disappointment. And eventually, a sustainable business emerges.

Cannabis is now in what the folks at Gartner would call the “trough of disillusionment.” The stock’s price has fallen by more than 50% over the last year. The fourth-quarter earnings report, which showed the company was near break-even, didn’t stop the fall.

Waiting for Returns

You tame a bear with profit, and you slay a bear with certainty.

Aurora’s Sept. 11 earnings report only covered the quarter ending June 30. September, the harvest quarter, won’t be reported until December. Right now analysts expect another small loss on revenue of $93 million.

The cannabis company points to growth to justify its market cap of $4 billion. Revenue has been growing rapidly, at nearly 50% per quarter, and another jump is expected. Aurora’s website talks a lot about social responsibility. But at the end of the day, it’s just like Altria (NYSE:MO).  ACB is selling a drug it hopes will be made legal, just as tobacco companies sell a drug they hope won’t be made illegal.

Drop the rhetoric and show me the money. Right now, Aurora isn’t doing that. Fourth-quarter revenues fell short of estimates given just a few weeks before. Even if most Americans favor pot legalization, they aren’t getting it soon.

Even after a state legalizes pot it can take up to a year to establish a market. By the way, U.S. federal law still treats marijuana like heroin. Until that changes it’s hard to see things moving forward rapidly. That’s why all the major pot companies are based in Canada, where legalization took place last year.

Waiting for Godot

The bull case on Aurora, as described by InvestorPlace’s Luke Lango, is that the company will be able to quickly ramp up production and supply a fast-growing U.S. market.

Aurora is able to deliver product for about $1.14 CAD per gram, or $24 CAD per ounce. And its gross margins are improving. The company expects to grow the product outdoors next year, as well as in greenhouses. That should cut costs further.

The best bull signal for Aurora is its cash level. That stood at $237 million at the end of June. For 2019 Aurora burned through about $143 million in cash, reported as $191 million CAD.

Looking at these numbers, InvestorPlace’s Faisal Humayan expects a continuing cash burn. The company claims there is a $70 billion opportunity in medical marijuana. But recent studies indicate it doesn’t cut opioid deaths and the U.S. Food and Drug Administration is warning about CBD oil, a cannabis derivative that is touted as a pain reliever.

The Bottom Line on ACB Stock

Marijuana is a drug, not a cure.

If people want to smoke a doobie on their back decks, most Americans say “let them.” But the product has been overhyped as a cure for pain and fatigue. It’s a patent medicine.

The question for investors should remain whether recreational marijuana will be legal in time to end the cash burn of Aurora and its competitors. I think it will, probably in 2021.

You can afford to wait a year before buying. (But smoke ’em if you got ’em.)

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/acb-stock-waiting-for-returns-federal-legalization/.

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