Alongside the entire cannabis market, shares of Canadian cannabis producer Aurora Cannabis (NYSE:ACB) have tumbled over the past year amid persistent demand challenges in the legal Canadian market, snail-like legislation in the United States, cash burn issues and mounting concerns regarding valuation.
It has been a perfect storm. Over the past 52 weeks, this perfect storm has caused ACB stock to lose more than 50% of its value.
Unfortunately for bulls, it doesn’t look like there is any relief from this selloff on the horizon. That is, looking out over the next three to six months, ACB stock will likely remain pressured by the same things which have dragged shares to all-time lows.
But, I remain bullish on ACB stock in the long haul, simply because this company has a realistic opportunity to be an important player in what projects as a multi-hundred billion dollar market in a decade. If that does happen, ACB stock will turn into a multi-bagger from current levels, making the risk-reward profile look quite attractive.
The investment implication? There’s a few. If you’re risk adverse, stay away from ACB stock all together. If you’re risk-seeking, wait for the tide to turn before buying the dip. Wait for persistent headwinds to disappear. Wait for secular tailwinds to show up. And, ultimately, wait for ACB stock to stop acting like a falling knife.
Then, and only after that, buy the dip in ACB stock. Until then, remain on the sidelines.
Aurora Cannabis Could Turn Into a Long-Term Winner
Despite the 50%-plunge in Aurora stock over the past year, I remain bullish on shares in the long haul for two very simple reasons.
First, the global legal cannabis market will be huge one day. What really matters here is that young consumers in developed economies consume cannabis almost as much as they drink alcohol. Cannabis consumption is on the rise while alcohol consumption is on the decline among those consumers.
Older consumers will phase out of economic relevance over the next decade. At the same time, those young consumers will earn bigger incomes and become the driving force of the global consumer economy. When they do that, I doubt their preference for cannabis will fade. Instead, over the next decade, cannabis will turn into a widespread and mainstream alternative to alcohol, and the cannabis market will grow to several hundred billion dollars in size, much like the alcoholic beverage market.
Second, the leaders in the global cannabis market will be $20 billion-plus companies, and Aurora has a decent opportunity to be one of those companies. In the multi-hundred billion dollar alcoholic beverage market, there are many $20 billion-plus producers who provide the alcohol supplied through various world-famous brands. The cannabis market will develop similarly. At present, Aurora — given its first mover’s advantage, size, production and distribution, as well as its strong brand portfolio — has a decent chance to be one of those companies one day.
Big picture: ACB stock still looks good long term.
Near-Term Pain Will Persist
Although ACB stock looks good long term, it has looked good long term for a long time. Yet, all shares have done is head lower. They will continue to head lower for the foreseeable future, so there’s no rush to buy the dip here.
ACB stock has been challenged by a few things. First, demand has been depressed by black-market competition and a slow retail rollout in Canada. These challenges will persist, mostly because Canadian legislation is moving at a snail’s pace, and so proposed solutions to bring demand into the legal channel and accelerate the retail rollout will take time to implement.
Second, margins are being hurt by black-market competition too, since a lack of legal fees and taxes means that the black market can price its product below legal market prices. Legal producers are being forced to discount. Aurora is faring better than other producers (gross margins are stable, as opposed to deteriorating). But, until legislation changes things, black-market pricing competition will remain a headwind for Aurora stock.
Third, U.S. cannabis legislation is moving at a snail’s pace, too. The Democratic-controlled House Judiciary Committee recently voted in favor of the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which legalizes marijuana at the federal level, among other things. But, passing the MORE Act through the Democratic-controlled House took forever. Getting it through the Republican-controlled Senate will take even longer. So, the U.S. revenue stream will likely remain offline for Aurora for the time being.
Broadly, then, the things which have weighed on ACB stock over the past year will continue to weigh on ACB stock. At some point, these headwinds will pass. But, investors should wait for them to pass before buying the dip.
Bottom Line on ACB Stock
I’m still bullish on ACB stock long term, because I believe two things. First, young consumers love cannabis, and as these young consumers turn into the driving force of the global consumer economy over the next decade, the global cannabis market will get very, very big. Second, Aurora has a decent chance at becoming a very important and sizable player in that huge market.
Long-term, then, ACB stock could be a multi-bagger.
Having said that, there are a plethora of near-term execution risks which will keep shares depressed for now. As such, there’s no rush to buy the dip here. Instead, wait on the sidelines. See how the cannabis market develops in 2020. Buy the dip if and only if the fundamental trends start to improve (demand and revenues accelerate higher, margins improve, net losses narrow, legislation makes meaningful progress, etc).
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
