Aurora Cannabis (NYSE:ACB) is heading for a long dark winter. At least that seems to be the general consensus. After a dismal earnings report, Aurora has greatly scaled back its ambitions. It shelved plans for new facilities, cut back on spending and has taken to increasingly painful measures to raise cash.
Still, it doesn’t seem like it’s going to be enough. After the earnings report, I wrote that it was time to give up on Aurora Cannabis. And that was indeed the case.
Aurora’s share price hasn’t recovered much after its initial dead cat bounce last month.
Aurora’s Cash Shortfall
Read through the latest coverage of Aurora at InvestorPlace and you’ll find that quite a few authors see Aurora facing a grim outlook. A difference in opinion comes down to just how bad the company’s cash situation will be. Does Aurora have the potential of going bankrupt? Or will it simply have to dilute shareholders significantly to stay funded?
InvestorPlace’s Vince Martin had an excellent breakdown on Aurora’s liquidity situation. He notes how Aurora has ended up in a more difficult situation because it didn’t have a big outside backer like Canopy Growth (NYSE:CGC) or Cronos (NASDAQ:CRON) did. As a result, Aurora has funded its expansion by issuing additional stock and loans. That worked fine when the share price was riding high, but it’s becoming a massive problem now.
Thus, the recent decision to suspend building the new growing facilities and cut back other expenses. It’s hard to justify issuing more stock down at these low prices to pay for greenhouses when the existing ones are struggling to deliver economic returns. But will these cutbacks be enough? After working through the math, Martin concludes that Aurora will need between 100 million CAD and 200 million CAD to make it through the end of fiscal 2021, even after suspending all the construction work on new growing facilities.
Is It an Existential Crisis?
The bears are right that Aurora probably won’t be able to sell more convertible bonds to raise money. When Aurora’s share price was higher, it had access to more attractive sources of capital, such as those low-interest rate bonds that enticed investors with the possibility of converting into stock. That was a great option when the stock was going up; it’s less interesting when it’s selling for less than $3 per share.
That said, I agree with those that say that Aurora is not at meaningful risk of bankruptcy in the near term. Aurora still has plenty of levers to pull to keep itself operational in coming quarters. It can trim spending more, sell assets and, of course, sell more common stock into the market. While the share price is low, the overall market capitalization is still $2.5 billion at the moment. Thus, the company can likely still sell hundreds million more in new stock and keep operations funded for coming years without running out of willing buyers. That’s the good news.
But the mere fact that we’re talking about whether or not Aurora Cannabis can remain going shows just how far the company’s stature has fallen. Earlier in 2019, it looked like Aurora might be able to build the best globally integrated marijuana empire across dozens of countries. Now it is rapidly shrinking merely to survive.
Aurora’s not going out of business anytime soon. But that doesn’t mean that the stock is a good buy. Far from it, in fact. The problem is that Aurora needs cash, and it is probably going to need to sell more stock to the public to get that money. In doing so, it places a ceiling on how high the share price can go.
Aurora Cannabis Needs Something Big
The problem for Aurora has been that its international efforts are taking a while to start generating meaningful revenues. It’s expensive setting up a global network of marijuana infrastructure, and Aurora seemingly built too far ahead of the curve. It was forward-looking, and could have been brilliant if it had worked. But in this case the risk has backfired.
Aurora can keep announcing small advances, such as getting a medicinal CBD oil approved in Ireland earlier this month. But these little steps simply aren’t enough to move the needle. Aurora is losing tens of millions of dollars every quarter, and there just isn’t enough scale yet in the global market to make up for the company’s elevated overhead costs.
If Aurora can hold things together long enough for major marijuana markets to emerge globally, the stock can still be a winner. But in the meantime, shareholder value erodes with every passing quarter as losses continue and shareholder dilution mounts.
Aurora’s Bottom Line
Ultimately, these marijuana companies need to generate profits and cash flow before their stock prices can make a sustained recovery. If you are wanting a marijuana company that can do that relatively soon, firms that are closer to profitability, such as Aphria (NYSE:APHA) seem like a better choice at this time.
Aurora’s management has a great vision, and there’s still some chance they’ll eventually be able to reach success. Aurora is one to keep on your watch list. But it’s hard to see anything that will turn the tide for the stock price in the near term.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.