It’s been a bumper year for the stock market, but marijuana stocks have been left out of that rally almost completely. Regulatory concerns, funding issues and rising health concerns have kept the sector from rising alongside the rest of the market.
Not all cannabis stocks are created equal, though. Some look better able to cope with today’s challenges and cement their place in the future, making them great buying opportunities in the current inflated market.
Canadian marijuana company Aurora Cannabis (NYSE:ACB) is not one of those opportunities. Despite losing more than 80% of its value over the past year, Aurora stock does not look like it’s going to make a comeback anytime soon.
After such a massive decline over the past year, the bottom feeders are starting to circle, but ACB stock may not have finished falling just yet. At the very least, the firm looks likely to continue languishing near its all-time lows in the near-term unless its management is able to pull a rabbit out of the hat and find a solution to the woes that have crushed Aurora Cannabis stock.
The Problem With Aurora Stock
ACB isn’t 100% to blame for its dire position. When Canada legalized marijuana, the government struggled with a massive influx of licensing applications and ultimately kept Aurora from getting its products on shelves.
If that was all Aurora was grappling with, investors might be able to overlook it as an industrywide issue. However, the firm is also struggling with problems of its own making as well. Perhaps the most concerning difficulty facing Aurora is its financial situation. The firm hasn’t been able to fund its incredibly aggressive expansion plans, so its management has been using ACB stock to pay for a number of strategic acquisitions. As a result, the company went from having 16 million shares of Aurora stock outstanding to more than 1 billion over the space of just five years.
The question of whether ACB’s acquisitions have been strategic is up for debate. The firm’s buying spree may have left it with questionable finances, including a staggering amount of goodwill on its balance sheet.
Goodwill is the premium a business pays for a strategic acquisition beyond the value of the tangible assets it’s purchasing. In every acquisition Aurora has made over the past three years, management has claimed at least half of the value of each deal was goodwill. Essentially, ACB’s management is hoping that the synergies and benefits that the acquisitions bring to the table will be worth at least as much as the premiums ACB paid.
But the goodwill looks unlikely to amount to anything more than a drag on the firm’s overall value. Nearly 70% of the firm’s total assets are goodwill and intangible assets. That’s not a comforting thought for investors.
ACB’s Partnership Hopes Are All But Lost
Another big blow to Aurora stock’s future in the cannabis space came just a few days ago when Coca-Cola (NYSE:KO) announced that it had no plans to enter the market. Many speculated that KO could be a potential suitor for Aurora, as the American giant has yet to partner with a large cannabis producer as most of its peers have.
ACB brought famed investor Nelson Peltz on as a strategic advisor in a move many thought would better position Aurora in the market. However, there’s been no progress towards a partnership, and ACB’s troubling financial situation means it won’t look very appealing to potential partners.
2020 on the Rocks
While some think marijuana stocks will perform well in the coming year, Aurora looks unlikely to enjoy any benefits that come from Canada’s second phase of legalization. Instead, some are cautioning that ACB’s finances could put the firm in a precarious position by mid-2020.
GLJ Research analyst Gordon Johnson says the firm’s $360 million credit facility with the Bank of Montreal (NYSE:BMO) could cause Aurora to suffer a financial meltdown. According to Johnson, there are a number of restrictions that could force Aurora to repay the loan sooner than expected, something Aurora couldn’t cope with in its current financial state.
The Bottom Line on Aurora Stock
Right now, almost every marijuana stock is considered to be a speculative play because of the state of the industry as a whole. For long-term investors, starting to build a small position in the space now isn’t a bad idea. However, I wouldn’t recommend buying Aurora stock. The firm’s shaky position in an unstable industry makes it far too risky, even in the long-term.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
