It’s safe to say things aren’t so rosy for Aurora Cannabis (NYSE:ACB) stock. Shares have plummeted around 76% from their 52-week highs. In the past month alone, ACB has cratered approximately 31%, from $3.60/share at the open Nov. 5 to $2.48/share at the close Dec. 4.
Shares have rebounded from their mid-November low of $2.14/share, but Aurora Cannabis stock is clearly a falling knife. The culprit? Capital crunch. Aurora is burning through cash like nobody’s business.
Based on the latest financials (released Nov. 14), operating cash flow losses continue to grow. For the quarter ending Sept. 30, 2019 (Q1 FY2020), the company hemorrhaged 94.9 million CAD (or $72 million). New financing and share issuance softened the blow. But dilution and leverage are not sustainable solutions.
As we head into 2020, expect more financial maelstrom for Aurora. With this in mind, the company’s shaky future is by no means an invitation to buy at today’s prices.
Tough Times for Aurora Cannabis Stock
For Q1 FY20, Aurora posted disappointing results. Medical sales rose 11%, but consumer net revenue dropped 33% from the prior quarter. Revenue as a whole dropped from 98.9 million CAD ($75.5 million) in Q4 2019 to 75.2 million CAD ($56.8 million) in Q1 2020.
In tandem with the earnings release, Aurora Cannabis announced big plans to keep its ship afloat. The company made a deal to convert debentures at an amended price. Aurora also mothballed construction of its Aurora Nordic 2 and Aurora Sun facilities.
On Nov. 29, Aurora hit another snag. The German government suspended Aurora’s medical marijuana sales in the county. The suspension will be lifted once health authorities review Aurora’s shelf-life extension methods. The company expects sales to resume “very early” next year.
This development is bad news for Aurora. Before, the company touted its “distinct first-mover advantage” in Germany. Yet, with its reputation harmed, the company could face more headwinds building out its European medical pot business.
The spread between production and sales continues to widen. In Q4 2019, Aurora Cannabis sold 17,793 kg against 29,034 kg produced. But in Q1 2020, the company sold just 12,463 kg, versus 41,436 kg produced.
This month’s rollout of “Cannabis 2.0” could help use looming inventory. Sales of edibles, infused beverages, and vapes are now legal in Canada. But capitalizing on “Cannabis 2.0” requires a massive investment. Without a strategic partner, Aurora must shoulder the costs itself if it wants a piece of the pie.
Dilution Fears Coming to Fruition
In past analysis of the stock, I discussed dilution risk. Turns out I was on the money. Last month, Aurora converted 99% of its 230 million CAD in outstanding debentures into common stock. Paying off this upcoming debt (maturity date of March 2020) was a key concern for investors.
The dilution was not massive (69.14 million shares) relative to Aurora’s large share count (over 1 billion shares outstanding). But it sets the precedent for more dilutive actions. With losses mounting, and cash dwindling, something’s gotta give. So far this year, Aurora Cannabis has sold 29.06 million shares of stock, for total proceeds of $124.4 million.
Until ACB reaches profitability, expect more dilutive capital raises. Even with its expansion plans scaled back, Aurora’s eyes remain bigger than its pocketbook.
Aurora is running out of options. Unlike its peers Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON), they lack a deep-pocketed strategic partner. There’s no Constellation Brands (NYSE:STZ) or Altria Group (NYSE:MO) waiting in the wings. Aurora hired Nelson Peltz to find them a partner, but so far remains without a match.
Will Aurora find a sugar daddy to keep the lights on? Possible, but not likely. Aurora Cannabis could go the joint-venture route a la Hexo (NYSE:HEXO). But until then, all bets are off whether Aurora can weather the storm.
Bottom Line: Avoid This Falling Knife
Aurora Cannabis is a dead stock walking. Or so it seems. Perhaps tax-loss harvesting is driving the recent sell-off. Come 2020, the ACB stock price could pick up as investors place contrarian bets on the company’s future. But looking at the fundamentals, this looks like pure speculation.
The Aurora stock price may be lower, but it’s by no means a cheap stock. Trading at an enterprise value/sales ratio of 13.8, Aurora is cheaper than competitors Canopy Growth (EV/Sales of 19.5) and Cronos (EV/Sales of 29). But with Aurora’s poor capitalization compared to these peers, that discount may be warranted.
So what’s the call? Like with this other beleaguered pot name, Aurora Cannabis is too risky to buy. But shares are even riskier to short. A crumb of good news could send shares skyrocketing. Save yourself the headache, and steer clear of the “pot bust” that is Aurora.
As of this writing, Thomas Niel did not maintain a position in any of the aforementioned securities.