If you’ve owned Aurora Cannabis (NYSE:ACB) since the beginning of 2019, 2020 can’t come soon enough. Down 52% year-to-date, the company’s stock is trading at October 2017 levels. This reality has prompted class-action lawsuits.
The Hagens Berman Sobol Shapiro press release states:
On Nov. 14, 2019, Aurora Cannabis shocked investors when it announced wider than expected losses and that revenue had declined by 24% quarter over quarter. In addition, the cash-strapped Company disclosed it would be halting construction immediately at its Aurora Nordic 2 and Aurora Sun facilities. This news sent the price of Aurora Cannabis shares plummeting about 17% on November 15, 2019, the largest single-day percentage decline for Aurora shares in more than five years and the lowest closing price since October 2017.
The national law firm is asking people who have suffered losses of $200,000 or more to contact its office to see if they qualify for compensation due to securities fraud by Aurora and its senior executives.
That’s quite the contrast to a stock that could do no wrong as recently as March 2019, hitting a 52-week high of $10.32.
Favorable Commentary
At the time, InvestorPlace contributor Tom Taulli suggested Aurora had multiple catalysts to keep its stock moving higher.
“Again, the stock price is likely to continue to be volatile. But so far, the momentum looks solid as there are multiple drivers like the Canadian market, the healthcare business and CBD opportunity,” Taulli wrote March 27.
Further, Taulli argued that bringing private equity investor Nelson Peltz on board as a strategic advisor should help the company as it grows its business. That included finding a potential partner in a similar vein as Altria (NYSE:MO) or Constellation Brands (NYSE:STZ).
These are all compelling arguments. God knows I’ve been supportive of Aurora’s stock in recent months, suggesting investors should buy on weakness. When I wrote those words, it was trading around $4.15, 69% higher than current prices.
“The volatility of marijuana stocks is not going to go away,” I wrote Oct. 8. “That said, I think Aurora continues to have a lot of irons in the fire that will boost Aurora Cannabis stock down the road. In the meantime, as was the case for much of the past month, a dip of its share price below $4.50 provides investors with a good entry point.”
I couldn’t have been more wrong about the near-term direction of Aurora’s stock price, but you don’t see me bellyaching about the deterioration of Aurora’s business.
The global cannabis industry is still in the early stages of its development. It’s natural for there to be winners and losers along the way.
Could Aurora Become Worthless?
GLJ Research founding partner Gordon Johnson believes it could. In a recent article from TipRanks, the investment website highlights some of the arguments Johnson makes for suggesting it could go to $0 by the end of 2021.
According to Johnson, a combination of too much debt, significant future dilution, no profits, and an oversupply in the Canadian market makes Aurora a loser bet.
“In 2020, there’s going to be about 3 million kilograms of cannabis produced in Canada, to satisfy a demand for… 1.06 million kilograms. That’s a recipe for oversupply, falling prices, and falling profits (or more precisely, continued losses at Aurora),” TipRanks writes.
Johnson’s not the only one that considers $0 a real possibility. InvestorPlace’s Vince Martin recently discussed Aurora’s troubling financial situation in a well-written examination of the potential levers it may or may not pull in the months ahead as it tries to pull itself out of the funk it’s in.
“The simple math right now looks extremely concerning for Aurora stock. Aurora closed its first quarter with 240 million CAD in cash, cash equivalents, restricted cash, and marketable securities. CFO Glen Ibbott said on the company’s Q1 conference call that capital expenditures for the rest of the year would total roughly 228 million CAD,” Martin wrote Dec. 11. “In other words, Aurora Cannabis right now barely has enough cash to fund its capital projects for just the next three quarters.”
Although Vince concludes that Aurora is unlikely to go bankrupt in the next two years, he’s unwilling to recommend its stock, which looks like it might decline further in the weeks and months ahead.
I’m Now on the Fence
As I contemplate Aurora’s future, I’m reminded of an article I wrote in November that looked at the net cash positions of the top six Canadian cannabis stocks.
Of the six, Aurora had the worst net cash position, followed closely by Tilray (NASDAQ:TLRY). Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) had the best net cash positions at $1.8 billion and $1.7 billion, respectively.
Both Canopy and Cronos have deep-pocketed partners to keep them flush. Aurora, to date, does not.
Some wondered whether Bruce Linton was selling Canopy’s soul by partnering with Constellation. Now it turns out this one move might keep Canopy afloat long enough to benefit from the cannabis boom.
Given the ongoing uncertainty of the Canadian cannabis industry heading into 2020, I would only consider well-financed cannabis plays at this point.
Is Aurora heading to $0? This time last year, the question would have been easy to answer. Now, I’m not so sure.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
