An Early Bet on Capacity Will Continue to Haunt ACB Stock

Capacity has become a liability for ACB stock in oversupplied market

The woes continue for Aurora Cannabis (NYSE:ACB). ACB stock continues to fall as concerns increase about the financial health of the company. The early bet the company made on capacity has deeply hurt the company as sales fall alarmingly short of production levels.

An Early Bet on Capacity Will Continue to Haunt ACB Stock
Source: ElRoi / Shutterstock.com

As a result, investors have begun to balk at the premium stock prices previously commanded by Aurora and other marijuana equities. This has led to a perfect storm that continues to hammer the sector.

While I do not think investors should lose all hope for Aurora Cannabis, the pain will certainly continue for ACB stock.

Many had considered Aurora stock a “top-tier” cannabis equity due to its production capacity. As cannabis stocks gained interest, it worked to make itself the world’s largest marijuana producer. Admittedly, that may have looked like a smart strategy in the past.

However, Aurora missed out in other critical areas. It has not made a U.S. hemp deal like Canopy Growth (NYSE:CGC). Neither has the company secured key investors from related industries like Canopy with Constellation (NYSE:STZ) or Cronos Group (NASDAQ:CRON) with Altria (NYSE:MO).

Now, a supply glut has turned Aurora’s bet on production into a huge disadvantage. ACB stock saw a massive drop following earnings in mid-November. While the company beat on earnings, it fell short on revenue. The worsening supply glut likely explains why.

The numbers explain the fallout from the supply glut well. Aurora Cannabis produced 41,436 kg of dried marijuana in its most-recent first quarter. Unfortunately, the company only sold 12,463 kg during the same period. In the quarter before, it sold 17,793 kg and produced 29,034 kg. The recent legalization of edibles and beverages will only offer limited help under such circumstances.

Exports Will Not Help

So too will exports. In the previous two quarters, it exported 4,553 kg and 4,481 kg, respectively.

Also, do not count on U.S. legalization to stop the death spiral anytime soon. Despite the passage of a bill to deschedule cannabis in a U.S. House committee, legalization still faces a long road. Senate Majority Leader Mitch McConnell has long opposed marijuana reform, though he met with industry leaders and toured cannabis facilities in October.

Other politicians have echoed these sentiments. Joe Biden still called it a “gateway drug” before walking the comment back. In my home state of Texas, the Lieutenant Governor blocked a decriminalization bill that likely would have passed otherwise.

About 67% of Americans now support legalization, a massive turnabout from 20 years ago when 63% opposed legal status for weed. For this reason, I think the pro-cannabis forces will eventually win these battles. Still, victory will probably not come quickly.

ACB Stock Is Set to Fall Further

Whether Aurora has enough time remains unclear. Aurora stock has fallen 30% since I started my “two difficult truths about ACB stock” in early November. I argued that Aurora will continue to fall as the cannabis stock bubble has not yet wholly popped. I also said the massive dilution and the drop in Aurora Cannabis stock would lead to a reverse split.

Unfortunately, both of these remain hard truths despite the equity’s difficult November. I have long criticized their massive dilution strategy. Now, others have begun to take notice of the company’s precarious finances.

Our own Ian Bezek also goes after the dilution strategy on Aurora stock. He calls it not only an effective way to raise money but also a “death spiral.” Even though I think Aurora Cannabis may still survive, I also cannot disagree with his description.

The Bottom Line on ACB Stock

Oversupply means the pain will continue for Aurora stock. Analysts have considered Aurora a top marijuana stock due to its lead in production capacity. Unfortunately, this has turned into a liability as their ability to produce far surpasses market demand.

With the lack of access to the U.S. market and further stock dilution likely coming, the company offers only reasons to bet against Aurora stock.

Aurora’s bet on supply could benefit the company eventually. However, first, it will have to find a way to survive the supply glut. Although it may do so, the company will have to sacrifice further value in ACB stock to achieve that end. Unless and until it can break the death spiral, investors should stay away.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2019/11/capacity-will-haunt-acb-stock/.

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