Generally speaking, the case for cannabis stocks goes something like this: while the industry offers compelling opportunities, that doesn’t guarantee viability for individual players. Unfortunately, that might be a problem for Aurora Cannabis (NYSE:ACB). Although one of the majors, Aurora stock has recently incurred sickening volatility.
As our own Will Ashworth noted, the company is facing a class-action lawsuit. In the disappointing earnings result for the first quarter of fiscal 2020, management disclosed that it would immediately halt construction in two of its high-profile facilities. Not surprisingly, ACB stock tanked, angering many stakeholders.
If that weren’t enough, the analyst community has started to turn against Aurora Cannabis stock in the ugliest of ways. In a stunningly bearish assessment, GLJ Research founding partner Gordon Johnson suggested that shares could drop to zero.
Using Ashworth’s summary, “a combination of too much debt, significant future dilution, no profits, and an oversupply in the Canadian market” makes Aurora stock a loser bet.
Personally, I first noticed Johnson’s analysis on a Yahoo Finance republication. And while keyboard commandos viciously attacked Johnson and his article as “fake news,” I don’t consider his assessment as baseless. Multiple analysts have sharply criticized ACB stock for its lack of fiscal credibility.
Although the longer-term narrative is positive – after all, we’re talking about an illegal market that is suddenly legal – the problem is that Aurora might not reach the promised land. In other words, Aurora Cannabis stock risks being the Moses of the cannabis market.
So, is it time to call it quits on Aurora stock? For conservative investors, ACB probably has the riskiest profile among the majors. However, the contrarians may have a long-shot opportunity.
It’s Global or Bust for Aurora Stock
Let’s assume for a moment that Canada is the only legal market for cannabis. In such a hypothetical situation, the picture for ACB stock admittedly wouldn’t be pretty.
Primarily, as Johnson mentioned in his report, the Canadian market is saturated with supply. In his estimation, supply exceeds demand by nearly 200%. And that doesn’t just impact Aurora Cannabis stock. Instead, every major player from Cronos Group (NASDAQ:CRON), Canopy Growth (NYSE:CGC) and Tilray (NASDAQ:TLRY) must fight for these scraps.
Logically, this entails sharp price reductions to appropriately meet the supply-demand dynamic. And while that might not bode too poorly for Cronos or Canopy, it will substantially hurt Aurora stock. To date, the underlying company doesn’t have a big backer like Altria Group (NYSE:MO) or Constellation Brands (NYSE:STZ).
But what these other companies lack – at least in terms of scale – is Aurora’s international presence. Currently, the cannabis firm has the biggest global footprint compared to its rivals. Granted, this hasn’t helped Aurora stock much this year. Moreover, the Canadian market puts food on the table and pays the bills.
Still, if Aurora Cannabis can survive long enough, the upside is incredibly lucrative. Setting aside the U.S. market, which I’ll discuss in a bit, the company has a vast presence in Europe. Lately, European politics suggest a warming to marijuana legalization, which we could see over the next few years.
In addition, the European cannabis market is booming and for good reason. One of the implications for marijuana legalization is the ability for medical patients to have natural and cheaper cannabis-based therapies.
Because of Aurora’s extensive investments overseas, this could help lift ACB stock from its doldrums.
Optimistic Signs in the U.S.
Of course, the most lucrative market of all for Aurora stock and its ilk is the U.S. Politically, you’ve got to like where the winds are blowing.
In the 2016 general election, a record number of states voted for marijuana legalization. Two years later, more states voted to legalize weed. And a month after that election, both Republicans and Democrats came together to pass the Agriculture Improvement Act of 2018.
Recently, the Democrat-controlled House approved the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. Because the Republicans control the Senate, this bill is unlikely to become law. But it’s part of a conspicuous progression that has consistently favored botanical freedom.
Put another way, the MORE Act may not pass, but a similar law most likely will. When, though, is the key for ACB stock. If the long-term catalysts that I mentioned take too long, Aurora definitely could fall to zero. I don’t think that will happen, but don’t be confused: this is a high-risk, high-reward play to the extreme.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.