Aurora Cannabis (NYSE:ACB) has pulled a nice rally during the past couple weeks. Over this time, ACB stock has gained about 24% to hit $2.04.
Of course, this is little consolation for long-term holders. A year ago ACB was fetching a much more robust price of $10.
No doubt, the rest of industry has seen steep declines as well. Just look at the charts for companies like Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON).
As for Aurora, there are certainly some bigtime challenges for the company. First of all, Aurora pulled off a string of acquisitions, which ballooned the company’s debt and added lots of complexity to the organization. It also did not help that several Wall Street analysts put out awful reports, such as Piper Sandler’s Michael Lavery, who slapped a $1 price target on ACB stock. But the worst of all came from GLJ Research analyst Gordon Johnson, who says Aurora stock will hit $0 within the next two years!
But hey, analysts are far from perfect. The fact is that Wall Street can get overly gloomy, especially when a sector goes out of favor.
However, this can present opportunities. With sentiment so bad right now, it won’t take much good news to perk up the stock price.
So what is the bull case for ACB stock and what are the drivers?
Canadian Market and ACB Stock
The problems with the Canadian market aren’t really about demand. Rather, they’re about distribution and enforcement. An onerous government process has made it extremely difficult go launch new retail locations. In the meantime, there has emerged more black market activities that have generally not been checked by the authorities.
Consider this: there are a mere 363 cannabis stores across Canada. That’s just one location for every 14,3188 cannabis users. Given this, it should be no surprise that companies like ACB have struggled.
Yet this will not be permanent. There are signs that Canadian authorities are being more proactive — and this should go a long way to help improve Aurora’s fortunes.
But there should be another catalyst — “Cannabis 2.0.” This refers to the legalization of cannabis edibles and beverages in Canada, which could be a multi-billion dollar opportunity for the sector.
Here’s what Aurora CEO Cam Battley said about this during the latest earnings call: “The initial suite of new products that we will launch include vapes, concentrates, gummies, chocolates, mints and cookies. We’ve selectively partnered with a variety of organizations, prioritized our resources and built the inventory to help ensure consumers across Canada will have access to our high-quality derivative products.”
Fiscal Restraint
Aurora is already taking actions to cut back on expenses. The company has initiated construction deferrals and slowed commissioning of projects, which is expected to save $200 million “in the near term.” The company also retired $227 million of a 5% unsecured convertible debenture that had a due date of March 2020. What’s more, if revenues continue to increase as the situation in Canada improves, this will definitely alleviate the pressures.
It’s also important to keep in mind that Aurora has Nelson Peltz as a strategic advisor. He is one of the world’s top investors for consumer stocks, with positions in companies like Procter & Gamble (NYSE:PG), Mondelez (NASDAQ:MDLZ) and Wendy’s (NASDAQ:WEN). In other words, he should be a great source of strategic advice, but should also provide key introductions to other investors and corporate partners.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
