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Have Patience With Aurora Cannabis Stock

Shares of Canadian cannabis producer Aurora Cannabis (NYSE:ACB) have found themselves in a secular downtrend over the past eight months, dropping from over $10 to less than $4 during that stretch, amid mounting concerns over the cannabis market and pot stock valuations.

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In the big picture, I think this selloff is overdone. Given its size, production and first-mover advantages, Aurora projects as a long-term winner in the cannabis market. That market will be huge one day. So will Aurora. Near-term growth and profit hiccups will turn into long-term growth and profit strength. In the long run, then, ACB stock will move materially higher from here.

But, this long-term move higher won’t start today.

Instead, in the near term, ACB stock likely will remain weaker. Why? Because ACB stock is still richly valued, with deteriorating macro-fundamentals and optics. That combination doesn’t inspire confidence in investors. Instead, it spooks investors, and spooked investors don’t buy. They sell. As such, so long as the macro-fundamentals and optics continue to deteriorate, ACB stock will keep dropping.

The investment implication? Be patient. ACB stock will recover. But, not today. Wait for signs of the turnaround to emerge before buying the dip.

Aurora Stock Will Be Fine Long Term

Long term, ACB stock will be just fine. More than that, from current levels, ACB stock has an opportunity to be a multi-bagger in the long run.

The logic here is fairly simple. You can go through the long-term bull thesis more here. To recap, consumers like to smoke, eat or drink cannabis just about as much as they like to smoke tobacco or drink alcohol. This is especially true among young consumers. Thus, the demand is there. All that needs to happen for this market to be huge, then, is for supply to come to market. It will. Consumer attitudes globally are changing to be more open of cannabis, and as a consequence, global legislation is gradually inching towards legalization. Once the legislation gets there, the market will be flooded with tons of legal supply.

Tons of supply plus tons of demand equals huge revenues. That’s largely why most estimates peg the cannabis market as being a $200 billion market at scale.

All Aurora needs to do to be a multi-bagger from current levels is nab roughly 5% of that $200 billion market in a decade — see the math here. Can it do that? Yes. This company is one of the biggest players in the space today, with well over 5% share. It is also growing as quickly as anyone else, so share is actually expanding. It has industry-average profit margins, with above industry-average growing capacity.

In other words, Aurora has the necessary ingredients to ensure long-term success in the cannabis market. Long-term success therein implies that ACB stock will roar higher long term, too.

Near-Term Concerns Will Keep Shares Depressed

Although ACB stock has potential to be a multi-bagger in the long run, shares won’t start their big recovery path today. Instead, like most other pot stocks, Aurora stock projects to remain weaker for longer.

The Canadian cannabis industry is a mess right now. The pace of cannabis store openings has been slower than expected, and as a result, the legal market has been constrained. Supply constraints have led to high prices. Importantly, it’s led to the legal market having higher prices than the black market. Thus, while cannabis demand remains robust, most of that demand is still in the black market channel, and has yet to migrate to the legal channel.

At the same time, there has been a delay in government approval of cannabis derivative products, which were supposed to provide a big late-year bounce for the whole cannabis industry. There has also been tremendous regulatory uncertainty, so the market is moving forward at a snail’s pace.

The financial implication? What was big growth for a lot of these cannabis players a few months ago is now dramatically slowing. Margins are taking a hit because of discounting. Long-term visibility is being reduced by regulatory uncertainty.

So long as these dynamics remain in play, all pot stocks — ACB stock included — will remain weak.

Bottom Line on ACB Stock

In the big picture, the cannabis market will be huge one day, and it will consolidate around a few large players. The implication is that of today’s hundreds of pot stocks, most will go bankrupt, while a few will turn into long-term winners.

ACB stock projects as one of the long-term winners. Thus, present weakness is overstated and ultimately a buying opportunity.

But, don’t be too quick to pull the “buy the dip” trigger. Given fundamental and regulatory challenges, ACB stock likely won’t bounce back anytime soon. As such, before buying the dip, wait for the risks to clear.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media,

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