If cannabis firms like Aurora Cannabis (NYSE:ACB) represent a new era in personal liberties, will it eventually show in the ACB stock price? That, along with many other questions, are being posed by investors after watching the sector breach new lows.
One of the most damaging events toward the legal cannabis market as a whole is the loss of credibility. Throughout this year, stakeholders have increasingly lost patience as names like Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) produced disappointing earnings reports. Due to guilt by association, Aurora stock tumbled along with the major Canadian outfits.
That’s not to say that Aurora Cannabis stock is any better at delivering credibility, because it’s not. Like the underlying company’s rivals, investors viewed pot players as overly ambitious, focusing on growth and expansion instead of stability. In other words, shareholders wanted some hard evidence of fiscal strength.
In that respect, ACB stock is especially risky. While one of Aurora’s positives is its international footprint, such attributes don’t come cheaply. As an incredibly acquisitive organization, management has racked up an eyebrow-raising $2.4 billion in goodwill. Essentially, goodwill is the premium an acquiring company pays for its buyouts beyond their tangible value.
By itself, having a large amount of goodwill isn’t a deal-breaker. But when combined with a deflating industry along with serious cash burn, it poses fundamental problems for Aurora stock.
Further, the Canadian marijuana industry overstated the nation’s demand for botanical products, leaving an oversupply issue. Adding to this woe, a backlog of cannabis licensing approvals means that companies can’t sell their weed.
With so much trouble impacting Aurora Cannabis stock, is there a buy case here?
Education Can Go a Long Way for ACB Stock
While I won’t pretend that Aurora stock isn’t ugly, I think it’s a disservice to say that it has no redeemable qualities. The bullish narrative is speculative and may require much patience, but it does exist.
Primarily, if you look at Aurora’s website, you’ll find that it’s largely a specialized medical marijuana player. Thus, the company isn’t just in the business to produce marijuana. Instead, they focus on streamlining cannabis-based therapies for myriad different symptoms and conditions.
For instance, Aurora bought out Whistler Medical Marijuana, which specializes in premium medicinal therapies. Initially, the buyout didn’t appear beneficial to ACB stock because of the acquired company’s modest output. But here’s the thing: not all marijuana products are the same. Similarly, you wouldn’t say that all cars are impractical. Some are gas-guzzling, two-seater sports cars that are the epitome of impractical. But most cars today are balanced between performance and practicality.
Weed is the same. According to UCLA Health, the cannabis plant has over 100 cannabinoids, two of the most popular being tetrahydrocannabinol (THC) and cannabidiol (CBD). Moreover, the plant has 500 distinct compounds, including terpenes, or essential oils.
Why Aurora bought out Whistler is to advantage the full breadth of cannabis, not just the flavor of the week. And the science backs up Aurora stock in this regard. Notably, as Psychology Today contributor Gary L. Wenk, Ph.D. mentioned, marijuana (with THC) is helpful for insomnia in certain cases, according to medical research.
But the popular CBD? Wenk wrote that CBD “was much worse than marijuana. CBD disrupted sleep patterns by reducing both NREM sleep and REM sleep. CBD alone is useless for insomnia.”
You wouldn’t recommend a Lamborghini for off-roading. Preventing such mismatches between strain and patient is the underlying catalyst for ACB stock.
Should You Buy Aurora Stock?
With this clarifying information in mind, Aurora Cannabis stock seems more appealing. At the very least, it’s understandable. Aurora isn’t in the race necessarily to outproduce. Instead, their focus is on providing any patient with a viable and appropriate cannabis solution.
Still, a recommendation to buy ACB stock is a tricky subject. First, it’s easier to address the opposite question. And that is, I probably wouldn’t short Aurora stock at this point. Shares appear to have stabilized since mid-October. Though the bad news for ACB is truly terrible, there are also well-known headwinds.
I like ACB stock for the longer term because of its medicinal potential. Additionally, a lack of understanding about what cannabis is and what individual company goals are has unfairly hurt Aurora Cannabis.
That said, it can take a while for both users and investors to appreciate this narrative. Therefore, at this juncture, I’d buy Aurora stock only if you are risk-tolerant. If you’re not, you may want to sit on the sidelines before a more confident time arrives.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.