At this time last year. investors were extremely bullish on marijuana stocks. Great things were predicted for companies such as Aurora Cannabis (NYSE:ACB).
ACB stock was soaring. This was due to the fact that cannabis was about to be legalized in Canada. You couldn’t watch the financial news on TV for more than five minutes without hearing about positive things some analyst had to say about marijuana stocks or how many millions some private equity fund made by selling its shares in a cannabis company.
Things certainly have changed in just one year. Many of these once-promising stocks have essentially crashed. ACB stock traded above $12 per share at this time last year. It closed yesterday at $4.12. That is a decline of over 60%. Just three weeks ago, it looked like Aurora Cannabis stock could rally to $7 a share, but since then it has been in a virtual free-fall.
What Happened to ACB Stock?
What is going on with Aurora stock? Why have things changed so dramatically?
Investors are finally realizing that hardly any cannabis companies are actually making any money. In fact, most of the larger companies are actually losing a lot of money. It has become apparent that, driven by hope and positive expectations, the rally of marijuana stocks last year had little if anything to do with actual valuation and profitability.
Aurora’s fiscal 2019 ended in June. For the year, the company reported a loss of $290 million dollars. That’s a loss of 29 cents per share of ACB stock. Many analysts also predict that ACB will continue to lose money this year. In Q4, Aurora broke even, while in the same time period last year it reported a profit of 12 cents per share of ACB stock.
In addition to worries about ACB’s losses, there are also concerns about the extraordinary amount of goodwill and intangible assets that it has on its balance sheet. Those amount to $3.86 billion, or about 90% of the market cap of ACB stock.
Large Amounts of Goodwill Continue to Pressure ACB Stock
To understand why high Goodwill concerns investors, you need to understand what Goodwill is. It is essentially the estimated value of the reputation and other intangible assets of a company. For example, suppose a company has total assets such as property and equipment that can be sold for $1 million. Now suppose another company pays $2 million to buy the first company. The extra $1 million, above the value of the actual assets, is considered Goodwill.
So, in theory if company A overpays when buying company B the amount of overpayment would now be considered part of the value of company A.
Aurora has made numerous acquisitions over the past couple of years. Some analysts argue that it has made too many. As a result, it has an excessive amount of Goodwill that is included in the valuation of ACB stock.
Eventually this Goodwill will need to be revalued. If it ends up being marked down significantly, Aurora stock will probably drop even further.
A Look at the Chart of ACB Stock
Aurora Cannabis stock has been in a freefall over the past three weeks. ACB stock is oversold, so it may bounce or undergo a relief rally soon.
As of this writing, the author did not own shares of any of the aforementioned companies.