Hold Off on Buying Aurora Cannabis Stock for Now

Aurora Cannabis (NYSE:ACB) has turned into one of the market’s most controversial stocks. It seems that, almost every week, an analyst makes another bold prediction about Aurora’s fate.

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In fact, many folks have taken to treating Aurora like a binary bet. Apparently, these investors either think the stock is going to turn around and become a star performer or it’s going to go bankrupt. Last month, I argued that a middle ground is possible. In such a scenario, Aurora would stay in business,  but won’t become profitable anytime soon. As a result, I argued. Aurora stock is not a great investment.

GLJ Research’s Gordon Johnson disagreed with me, however. He came out recently, in fact, with a $0 price target for Aurora stock. Johnson says that the company simply has too much debt and will never reach profitability. As a result, he thinks that the shares have no value. If that wasn’t enough, two more analysts have already placed “sell” ratings and $1 price targets on Aurora stock so far in 2020.

But after Aurora stock sank at the very beginning of the year, in the wake of those three bearish assessments, the tide turned. On Wednesday, investors shockingly bid Aurora stock back up 15% in a single trading day.

After all this excitement, I’m still taking a middle position. Aurora’s not going bankrupt imminently, and analysts should really cool it with the $0 price targets. On the other hand, Aurora stock isn’t miraculously going to shoot back up overnight either. Investors need to calm down and assess the situation, rather than taking one of those extreme positions.

OrganiGram Gave the Sector A Lift

On Jan. 15, OrganiGram (NASDAQ:OGI) sent shockwaves through the marijuana sector. The company reported fiscal Q1 earnings per share of 0c, topping analysts’ average estimate of a 2 cents per share loss. Moreover, its Q1 revenue soared more than 102% versus the same period a  year earlier to $25.15 million, versus the average estimate of $14.9 million.

Shockingly, OrganiGram’s stock rose nearly 50% in the two trading days following its earnings release. And its shares have nearly doubled off their 52-week low, which was reached on Jan. 13. The reaction has been so strong, in fact, that most other marijuana stocks have also rallied, and ACB stock has started to go along for the ride.

Aurora Isn’t OrganiGram

It’s easy to give Aurora and OrganiGram a quick glance and assume that Aurora could mimic OrganiGram’s turnaround. For starters, their stock prices last year were similar.

Organigram dropped from $8.44 to a low of $1.89. Meanwhile, Aurora’s stock fell from a high of $10.32 to a low of $1.50. Thus, they both fell by similar amounts, and both bottomed just below the $2 mark. Both companies also have significant exposure to vaping and the legalization of cannabis-infused food and beverages in Canada. And both have struggled, up until now, due to Canada’s painfully slow rollout of legal marijuana stores. So if OrganiGram has managed to turn the corner, why won’t ACB stock do the same?

For one, Aurora has many more shares outstanding than OrganiGram. So despite its still-depressed share price, Aurora has a market capitalization of more than $2 billion. OrganiGram, by contrast, is only worth about $500 million, even after its share price almost doubled.

Also, OrganiGram has a far better balance sheet. It has just 78 million CAD of long-term debt. Its assets are worth more than five times as much as that, and it can cover nearly half of its debt with its cash.

Given the state of its balance sheet and its business that is already roughly breaking even, OrganiGram has the funds to stay in the game for the long haul. By contrast, analysts are still saying that Aurora  is heading toward bankruptcy.

Aurora’s Financial Situation

Gordon Johnson, as I noted previously, thinks Aurora stock could drop to $0 fair quickly. That’s because if Aurora can’t become profitable this year, it may violate covenants it entered into with its lenders.  In such a scenario, its creditors could take control of the company,  making Aurora stock nearly worthless.

But I doubt if things will play out like that. For one, Aurora has drastically cut back its spending after halting its expansion plans.  It’s also now trying to sell off some of its assets. Since  Aurora built one of the largest footprints in the marijuana space, it should be able to recoup some funds if it downsizes.

Additionally, Aurora has been issuing new shares of Aurora stock to raise more cash. After the shares bounced off their lows, the company should be able to easily sell more stock for cash. The fact remains, however, that Aurora’s financial situation is more complicated than that of OrganiGram. As a result, it will probably take much longer for sentiment towards Aurora stock to rebound.

The Bottom Line on ACB Stock

Traders loved marijuana stocks when they were booming. And many have remained devoted to the sector,  even though the sector’s shares have been dropping most of the time since Q2 of 2019.

The sector will probably continue to be very volatile going forward. As long as analysts are saying Aurora stock is worthless, and other people are saying the shares could triple or more, many investors are going to be very emotional about marijuana stocks.

But investors should try to keep a level head. The slump of marijuana stocks isn’t going to end tomorrow. OrganiGram deserves credit for putting up solid numbers. But its results won’t lead to a renaissance of the marijuana industry in general or Aurora Cannabis in particular in the near future.

Before ACB stock really starts going places, Canada needs to figure out how to launch enough retail stores,  consumers need to buy a great deal of cannabis-infused food and beverages, and Aurora will have to build out more overseas distribution channels.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/hold-off-on-buying-aurora-cannabis-stock-for-now/.

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