When it comes to risky marijuana stocks like Aurora Cannabis (NYSE:ACB), I am a buzzkill. The misgivings I had about ACB stock in June, such as its more than 1 billion shares outstanding, weak financial position and lackluster weed demand, are still there, and new ones have emerged.
Let’s go over my bear case for ACB.
Canada’s year-old legal pot market is developing slowly. According to media reports, there are around 500 retail stores in the country that sell weed. That’s roughly in line with the 560 locations in Colorado that sell recreational and medicinal cannabis, most of which are in the Denver area. That works out to approximately 10 stores for every 100,000 residents.
Slow Going at Canada’s Pot Market
The country, though, has a population of about 35 million, spread over the world’s second-largest country by geographic area. That’s roughly seven times more than the 5.6 million folks who call Colorado home. Market researcher AltaCorp estimates Canada would need 3,640 stores to match Colorado’s density. The firm forecasts Canadian market sales to reach $10.5 billion CAD ($8 billion) by 2025.
ACB also is ramping up production in a big way, from 150,000 kilograms to 500,000 kilograms by 2020, which will make the existing pot glut even worse. Only 4% of the pot produced in Canada gets used. International markets have also been slow to develop, hurting the company further.
Forbes contributor Stephen McBride and others have taken note of ACB’s spending spree on farms and greenhouses, most of which are unused. He also found what he described as ACB’s “dirty little secret,” where it was reclassifying part of its harvest as “wholesale” because of weak retail demand.
Vaping Dangers Loom
As if that wasn’t enough, along comes the vaping health crisis. Scientists at the Centers for Disease Control and Disease Prevention suspect THC, the psychoactive ingredient in marijuana, could be the cause of the illnesses. Pot fans, not surprisingly, are switching from e-cigarettes backed to pre-rolled joints, which are less profitable.
Any negative publicity around THC health risks is lousy news for ACB, which touts cannabis as a low-risk treatment for all kinds of ailments. Short of some major scientific breakthrough, the overhang on the marijuana sector from the vaping issue will depress pot stock values for the foreseeable future.
Shares of ACB have slumped nearly 30% since the start of the year. The money-losing company has no shortage of fans. Wall Street analysts have a median price target on the stock of $5.27, roughly 46% above its current price. I can imagine an unlikely scenario when the moon and stars are in alignment where this could happen.
That’s why I am taking a pass on the stock.
As of this writing, Jonathon Berr did not hold any of the aforementioned securities.
