In November, cannabis stocks started rallying, with some of the big names rebounding back to levels last seen in October. But marijuana stocks with fundamentally weak prospects failed to recover, and their near-term outlook remains bleak.
Aurora Cannabis (NYSE:ACB) is a marijuana stock that’s worth watching closely. The company just opened a flagship store, even though it’s reducing spending on some of its major projects. How will Aurora stock fare in the next few quarters?
Aurora opened its first flagship store in Edmonton, Canada on Nov. 27. The store will not only sell products, but also educate the public about the sector. Specifically, it will host workshops and discussions featuring artists and innovators.
The store may not generate the rapid revenue growth some investors had previously expected. But if cannabis is legalized in the U.S., Aurora has a model it can use to launch stores in America as it expands.
U.S. malls could benefit by hosting cannabis stores as their occupancy rates decline.Aurora’s retail-facing business model will also help promote its brand name to the public. The stores will also enable the company to differentiate itself from its competitors.
The Risks of Aurora’s Retail Strategy
Aurora’s foray into physical retail stores is not without risk. The consumer traffic of retail malls is declining, although the mall in Edmonton that Aurora is entering has 30 million visitors per year. But Aurora will also incur rental property costs. And, facing competition from other legal suppliers and the black market, Aurora may have difficulty keeping up with these costs.
Share Conversion
On Nov. 25, holders of Aurora’s debt converted their debt into Aurora stock. The swap reduced the company’s debt by 229 million CAD. The share conversion will dilute investors in the short-run but strengthen Aurora’s balance sheet over the long-term.
Aurora has a global vision and multiple vertical markets. Unlike its peers such as Canopy Growth (NYSE:CGC) or Cronos Group (NASDAQ:CRON), Aurora is independent and may execute its global growth strategy without the interference of external board members.
The Timeline of Aurora Cannabis Stock
Aurora stock is under pressure as investors close their books for the year and get set to claim capital gains and losses. That could hurt Aurora’s stock price this month. And while Aurora’s business model faces pressure from falling product pricing and excess supply, market forces will work through these imbalances. As more stores open in Ontario and the U.S. potentially legalizes cannabis in 2020 or later, Aurora is in a good position to grow.
Aurora is the largest pot producer that has not yet signed a partnership with a major corporation. If the sector rebounds, ACB may be in a better position to bring in a partner that has the distribution channels and retail experience to accelerate Aurora’s growth. Therefore, investors who are bullish on Aurora stock need to have a timeline that is at least three to five years in duration. That’s because ACB stock may underperform for a long time and fall further before it climbs.
Valuation and the Bottom Line on Aurora Stock
12 analysts have an average price target on Aurora stock of about $5.00. To reach that target, Aurura needs to continue to deliver strong revenue growth. And even though revenue growth of 300% or more is not sustainable, a 10-year compound annual growth rate of about 40% is achievable. A 10-year growth exit model, provided by finbox.io, indicates that the fair value of ACB stock is consistent with analysts’ average price target.
Aurora stock is out of favor and is at risk of falling steadily over the next few quarters. Those who bought the stock over the last year will have a big loss on paper. Nevertheless, selling the shares now and buying Aurora Cannabis stock later is a sound strategy. Alternatively, holding the stock for a few years may pay off if cannabis prices stop falling and supply levels diminish.
As of this writing, the author did not hold a position in any of the aforementioned securities.
