On Jan. 8, Alberta-based Aurora Cannabis (NYSE:ACB) stock price hit a new 52-week low of $1.71, before the stock hit $1.56 earlier today. Now, with pessimism at an all-time high, contrarian investors are wondering if early 2020 may be an opportune time to buy into the Aurora stock share price.
However, it may still be too soon to commit any new capital to ACB stock, as the company has not yet been able to show how it will achieve consistent profitability amid a range of industry-wide issues. With that being said, investors may want to analyze the next quarterly numbers — expected in early February — before they go long the stock.
What to Expect From ACB Stock’s Earnings
Aurora Cannabis is the market-leading producer in Canada. Yet, last year, ACB stock lost about 59% of its value. In comparison, The Alternative Harvest ETF (NYSEARCA:MJ), Cronos (NASDAQ:CRON) and Canopy Growth (NYSE:CGC) shares lost about 32%, 25% and 23%, respectively.
Behind this underperformance of Aurora stock are important fundamental issues. When the group released 2020 first-quarter results in mid-November, investors were clearly disappointed.
Revenue growth was down 24% sequentially over the previous quarter. This was due primarily to lower Canadian recreational revenues, which slipped 33% and lower wholesale revenues, which decreased 49%. Analysts also raised eyebrows as medical cannabis revenue increased a mere 3%. The company received fewer orders from provincial governments.
The Street has also been extremely concerned with the cash burn levels at Aurora Cannabis. Following the recent restructuring of its convertible note that was due in March, the company now has the liquidity to survive 2020. But “then what?”, investors wonder. There is clearly a lack of cash across the industry.
When the company next reports in several weeks, investors would like to see a stronger balance sheet and fundamental metrics that would give inspire confidence in management’s long-term ability to operate as an efficient entity.
Otherwise, it would mean too much uncertainty for shareholders and the downward spiral may not stop in early 2020, either.
Further Headwinds for Aurora Cannabis
In December, Aurora stock was downgraded mainly because of a lack of clear path to profitability in the horizon any time soon — but also due to managerial developments.
Chief corporate officer Cam Battley left the company. and he was one of the better known faces of the company. This executive shakeup was abrupt. However, ousting leadership seems to be the new trend in the industry. For example, several months ago Canopy Growth pushed out founder and former CEO Bruce Linton. Aphria (NYSE:APHA) and CannTrust Holdings (NYSE:CTST) have had similar managerial changes, too.
Secondly, Jason Dyck, a director, sold 57% of his holdings in Aurora Cannabis. Such managerial moves, including executives departing or selling most of their holdings, speak loudly — especially in case of stocks that are already suffering badly.
In the most recent quarterly update, CEO Terry Booth highlighted that distribution and regulatory headwinds have caused havoc in the industry. Excessive inventory levels and weaker-than-expected market growth in Canada have been the two themes of 2019.
It is important to remember that cannabis is an agricultural commodity that has only been recently legalized in Canada. That being said, annual Canadian sales are not likely to exceed $4 billion.
Elsewhere, there is no demand for recreational pot — a fact that is not likely to change any time soon. Also, medical cannabis sales worldwide are also limited. Therefore, company valuations should and will ultimately be based on actual demand and supply parameters, as well as legal developments.
Where Aurora Stock Price Is Now
2019 can be summarized as catastrophic for the price of most cannabis stocks including ACB. The industry is in now in a multi-year down trend.
This recent weakness in the industry corresponds with the longer-term trend of Aurora stock price. In 2017, Aurora Cannabis shares had traded between $1.75 to $2.00.
Now, we are back at those levels, and it is therefore only appropriate to ask where ACB stock price might go from here.
If you are an investor who also follows technical charts, you may be interested to know that neither the long-term chart nor the short-term one for Aurora Cannabis looks too promising. The current downtrend in the share price would need to stop and stabilize so that ACB can build a base before a meaningful rise can start again.
In the coming weeks, I expect Aurora stock to trade between $1.50-$2. For ACB stock to make an up move that can also act as a long-term buy signal, the share price has to go and stay above $2, which has now become a resistance level. Yet, from a fundamental valuation standpoint, the stock is not necessarily a bargain at $2, either.
So Should You Buy ACB Stock in 2020?
In hindsight, 2019 may well be remembered as the year when the hype surrounding cannabis stocks has burst. Like most other members of the industry, Aurora Cannabis shares have fallen hard.
I do not believe ACB stock offers an attractive risk-reward tradeoff yet. In other words, it may still be early to go bottom-fishing on cannabis stocks in 2020. Therefore, investors who buy into the shares at these levels should be ready to hold Aurora stock for several years.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
