Aurora Cannabis (NYSE:ACB) stock is at a crossroads. The cannabis company isn’t expected to become profitable any time soon. That means the company will continue to bleed cash flow, and ACB stock could drop further.
Moreover, some believe Aurora stock is likely to fall below $1, a key threshold. Many investors don’t want to own shares in a cash-flow-negative cannabis company.
Investors believe drug-selling companies are supposed to be profitable. So where’s the beef? Where is the promise of an efficient, huge-money-making cash cow?
They don’t really care about the excuses that ACB and other cannabis stocks are dishing out. They want results.
Analysts Are Negative on Aurora Stock
Analysts are not putting up with excuses either. For example, Piper Sandler analyst Michael Lavery has downgraded Aurora stock to “sell.”
Lavery issued a $1 price target; Aurora currently trades around $1.66, so that’s a 38% expected drop in ACB stock price.
Lavery doesn’t expect Aurora to achieve positive cash flow from operations until the third quarter of fiscal 2021.
Moreover, Aurora will have to refinance 360 million CAD worth of debt due in August 2021. Aurora will have a cash deficit of 200 million CAD up until then.
As a result, Aurora will end up with 800 million CAD in debt. Also, it will have only 30 million CAD in cash to finance its operations.
Lavery says it will have to operate in an “austerity” mode. It may have to sell off key assets.
Bank of America analyst Christopher Carey also downgraded Aurora stock. He cites the same balance sheet problems that Lavery highlighted. However, he noted that Aurora still has a strong position in the recreational cannabis market.
Seeking Alpha’s analyst database says that seven out of 13 analysts have issued ratings downgrades in the last 90 days. Moreover, analysts are not expecting the company to be net income profitable until Jan. 2023.
What Aurora’s Issue With Reaching Profitability?
I have been consistently negative on Aurora stock. For example, in Nov. 2019 I wrote that Aurora has little chance of making money. So far, my advice has been right.
Now that these influential analysts have come out with dire predictions, investors are likely to be more cautious. The thinking will go, Why not wait until Aurora stock hits $1 to buy the stock? Maybe by that time the outlook for the company and its prospect of reaching profitability will have changed.
For example, it appears that one of the main factors inhibiting Aurora from making money is the lack of approved stores in Canada. Once more stores have been opened, Aurora could sell more weed products.
In other words, the lack of profitability isn’t from a lack of demand. It’s a supply-side problem driven by regulation. That seems like a temporary issue.
But as the Wall Street maxim goes, the market can stay irrational longer than a company can stay solvent. The analysts referred to above are basically restating this famous Wall Street adage.
What Should Investors Do With ACB Stock?
Therefore, most investors will likely “wait and see.” The company has yet to release its fiscal-second-quarter earnings report for the period ending Dec. 31.
It’s probably better to wait and see what analysts say at that point. Will they have changed their outlook? Will the company be closer to profitability?
Surely Aurora knows it has to reach that goal more quickly than its present course. Let’s see if Aurora gets the point.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.