After an ugly 2019 where the entire sector fell off a cliff, marijuana stocks are attempting to stage a big comeback in early 2020 amid a series of favorable legal and fundamental developments. Year-to-date, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ) is already up more than 10%, an impressive average gain of about one percent per trading day. Leading the way, cannabis giants Tilray (NASDAQ:TLRY), Canopy Growth (NYSE:CGC), and Cronos (NASDAQ:CRON) are up 30%, 20% and 12% respectively so far in 2020.
One pot stock that didn’t get an invite to the party is Aurora (NYSE:ACB). Instead, while many of its peers have rattled off double-digit gains through the first two weeks of the year, Aurora stock has dropped by 5%.
Why the relative weakness of Aurora stock? A few Wall Street downgrades, persistent concerns about the company’s cash burn and balance sheet, as well as some hiccups in the company’s international expansion plans.
Put it all together and Aurora stock has been unable to rally alongside its cannabis peers. The question now is, how much longer will this relative underperformance last?
Not much longer. Here’s why.
Aurora Stock Fundamentals Will Improve
Aurora’s fundamentals are admittedly ugly right now. Falling sales, falling margins, widening losses, a shrinking balance sheet and lots of Wall Street downgrades. But most of these adverse trends will reverse course in 2020 as the company’s fundamentals dramatically improve.
This all starts with the idea that Canada’s legal cannabis market will rebound in 2020. Demand trends will improve thanks to the introduction of new edible and vape products, as well as aggressive retail footprint expansion. These improving demand trends mean demand will catch up to today’s supply glut, providing a lift to average selling prices across the market.
Concurrently, there will be a series of favorable legal developments across the globe as more and more governments accept the idea of legal marijuana, and as companies like Aurora more and more aggressively monetize their huge supply volumes through international business expansion.
What does all that mean for ACB stock?
Improving demand trends in Canada coupled with aggressive international expansion will turn falling sales into rising sales. Higher prices across the Canadian market will turn compressing margins into expanding margins. Rising sales plus expanding margins will turn widening losses into shrinking losses. Pressure on the company’s balance sheet will ease significantly. And amid all these favorable developments, Wall Street will stop hating the stock, with a likely flurry of upgrades throughout 2020.
Net net, there’s reason to believe that the presently depressed Aurora growth narrative will improve significantly over the next few quarters.
ACB Value Will Bounce
As Aurora’s growth narrative improves in 2020, Aurora stock will rebound from today’s depressed levels in a big way.
That’s because ACB stock is too cheap for its own good, plunging to a dirt cheap valuation due to persistent balance sheet and liquidity concerns. On an enterprise-value-to-one-year-forward-revenues basis, Aurora stock is about as cheap as it gets in the cannabis sector (only 4-times EV-to-forward-revenues, versus an 11-times multiple for Canopy Growth stock). It reasons that as marijuana socks rebound in 2020, ACB stock could rebound even further given its current depressed valuation.
Indeed, my long term model on Aurora stock implies a somewhat visible pathway for this $2 billion company to one day fetch a $40 billion market cap, assuming that Aurora can leverage first-mover’s advantage, an early production capacity lead and respectable brand equity to turn into one of the more important players in the global cannabis market in 10 years.
That’s simply too much upside to ignore at current levels. Consequently, if Aurora’s fundamental trends do improve in 2020, ACB stock will likely head way higher.
Bottom Line on Aurora Stock
The bull thesis on Aurora is predicated on the idea that improving global cannabis market fundamentals will inevitably lead to The company’sgrowth trajectory similarly improving in 2020. If that doesn’t happen, Aurora stock will simply keep dropping.
If it does happen — and I think it will — then Aurora stock could be due for a big up year. Of course, that means Aurora is a high-risk, high-reward play. If you aren’t game for that risk, go check out Canopy Growth. There’s a lot less risk there.
But, if you’re willing to take a risk on a potential multibagger in the pot sector in 2020, ACB stock is worth a look.
As of this writing, Luke Lango was long CGC.