As of June 30, Aurora Cannabis (NYSE:ACB) had $315 million in cash and other short-term securities on hand. But it lost $192 million on operations during the year, and another $312 million on investments. The cannabis company reported a net loss of $290 million. It’s also sitting on $250 million of debt.
If Christmas is coming for the marijuana business, it needs to come soon. ACB, one of the leaders of the legal cannabis market, is overloaded with assets and flying low to the ground.
Investors have taken notice. Aurora opened Oct. 31 at $3.64. That’s down 30% from January 2019 prices and 60% from ACB stock’s March 19 high.
What were those people who bought at $10 per share smoking?
Legalization’s Long March
Six months ago, cannabis companies were confident legal marijuana was about to sweep America. After all, Canada had legalized it in 2018.
But legalization is one thing and normalization is another. Normalization requires an organized, fully taxed and open marketplace. Normalization means you can go into a shop, buy the product and then spend the afternoon puffing without fear of repercussion.
That’s not happening yet. Canada’s provinces have been slow-walking normalization. So too have those nine American states that joined Washington and Colorado in legalizing recreational marijuana in the last few years.
Illinois may be typical. The state legalized pot early this year but isn’t taking applications for dispensaries until Dec. 10. The first 75 licenses submitted will then be graded on things like the applicants’ military status and levels of community engagement. It’s clear Illinois wants to make sure the profits go to the “right people” — locals and existing dispensaries — and not Canadian-based, multi-national companies.
A local analyst said Canada had legal pot sales worth $524 million in the first 10 months of its legalization. An industry group offered an estimate of $850 million for the full year. But that means only 105,000 kilos had been consumed in Canada, while about 3 million were produced.
Aurora, however, keeps building like there’s no tomorrow. It sold its shares of Green Organic Dutchman (OTCMKTS:TGODF), but it is still in grow mode. The Green Organic Dutchman, meanwhile, is curbing production.
The Illegal Market
Companies like Aurora and Canopy Growth (NYSE:CGC) saw hordes of buyers coming into regulated stores to buy their stash. But most smokers just want to be left alone. Half of Canada’s pot smoking is still of the illegal variety. In California, it’s as much as 75%.
That may not change quickly. Pot is a lower priority for police now that it’s becoming more accepted. It’s also cheaper to grow it than to go into a store and pay tax. To win the market, companies like Aurora have to do more than slap Bob Marley’s name on a packet of smokes. They must convince consumers to pay their price.
Aurora seems to have built big for a party that didn’t happen — or at least not in the way it thought it would.
The Bottom Line on ACB Stock
The cannabis industry suffers from oversupply and high capital spending.
Aurora is responding by talking about alternative uses of the crop, like CBD oil, hemp products and wafers that don’t get you high.
Despite all the talk of institutional support for the market, individual investors still control most of ACB’s $3.7 billion market capitalization.
InvestorPlace’s Vince Martin has wisely suggested you avoid Aurora. There are over 1 billion shares outstanding. There are 161 million shares being sold short, even at the current price. The enterprise value, both equity and debt, is 10 times sales.
Until there’s a big buyer here, don’t be a small one.
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 email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.