Canadian cannabis giant Aurora Cannabis (NYSE:ACB) has not had a stellar month, and that’s an understatement. After a rare surge that enabled Aurora stock to hit $3.12 on November 12, bad news is again hurting ACB stock. The latest blow came on Monday, when a research analyst set a $0 price target on Aurora stock, triggering a 7.48% drop that pushed ACB down to $2.35 at the end of the day.
Is Aurora Cannabis stock really going to become worthless?
An Analyst Set a $0 Price Target on ACB Stock
On Monday, GLJ Research analyst Gordon Johnson shook up marijuana stocks by initiating coverage of Aurora Cannabis with a “sell” rating and a two-year price target of $0. Johnson cited several factors as reasons for his extreme bearishness, including the company’s high debt load and his belief that the Canadian cannabis market could become oversupplied.
Johnson also described the recent challenges faced by The Green Organic Dutchman (OTCMKTS:TGODF). Aurora Cannabis actually owned a chunk of Green Organic, an organic marijuana producer, and dumped those shares in September. In October, Green Organic’s shares tanked when it ran into difficulty obtaining financing from Canadian banks. It was going to use the funds to complete two growing facilities.
In its latest earnings report, Aurora listed 1.14 billion CAD of loans. Assuming Aurora can’t become profitable, the company may need additional financing to meet those obligations. Green Organic’s experience indicates that bank financing may be tough to come by for Aurora.
In addition, some estimates suggest that as much as 3 million kilograms of recreational marijuana may be produced in Canada in 2020. But in 2019, the first full year of legalization, Canadians are on track to buy only 900,000 kg of marijuana. Johnson thinks Canadian cannabis demand will rise to 1.1 million kg in 2020, resulting in oversupply and, potentially, falling prices. That scenario would make it all but impossible for Aurora to be profitable. According to Johnson, the combination of high debt and a lack of profitability will cause Aurora Cannabis stock to become worthless by 2021.
The Cannabis Market Is Challenging
While Johnson’s prediction may be extreme, there’s no denying that cannabis companies have faced serious challenges.
In particular, the Canadian recreational market has failed to develop into the gold rush bullish investors had hoped for. Among the challenges faced by cannabis companies are lower than expected consumer demand, production challenges and a lack of licensed retail outlets. The latter issue is especially problematic in Ontario, Canada’s most populous province. Consequently, the recreational marijuana market has simply failed to meet bulls’ high expectations.
And the sector’s problems aren’t limited to Canada. ACB stock dropped at the end of November after the company’s medical marijuana sales were suspended in Germany by the country’s health officials.
Aurora stock was trading over $10.50 last October when pot was legalized in Canada. ACB stock has lost nearly 78% of its value since that time.
Is Aurora Stock Really on Track to be Worthless?
So is Aurora stock truly poised to be worthless in 2021?
That is a pretty extreme call. Other analysts are a little more optimistic, at least in the shorter term. With a median 12-month price target of $4.52 and an average rating of “buy”, the 17 analysts polled by CNN Business aren’t as pessimistic about Aurora stock.
A number of factors offers some hope to the owners of marijuana stock. National legalization of cannabis in the U.S. came a step closer to reality in November. Ontario has announced that it will allow cannabis retail locations to open at a faster pace in 2020, a move that could dramatically boost Canadian cannabis sales. And Cannabis 2.0 — the next phase of legalization that will enable food and beverages with cannabis to be sold legally — launched in Canada on Dec. 17.
ACB stock may not yet have bottomed, but there’s a good chance that the shares will perform better in 2020 and 2021 than they did in 2019.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.