With Aurora Cannabis (NYSE:ACB) falling below the $2/share price level, what are the chances of a rebound? Shares of major pot stocks like Canopy Growth (NYSE:CGC) have rebounded from their lows, but Aurora stock has continued to crumble, as investors become more bearish on the company’s survival.
Lack of profitability is par for the course with pot stocks. But unlike peers like Canopy and Cronos Group (NASDAQ:CRON), Aurora stock lacks a war chest to ride out the storm. Canopy and Cronos have the backing to keep them stable. Aurora lacks such a buffer.
Can Aurora surprise investors and start making a rebound upward? The company’s cash crunch remains a roadblock. But, just a crumb of good news could send shares higher. With about 17% of float sold short, Aurora stock could rebound on a short-squeeze alone.
However, long-term, Aurora has its work cut out for them. Let’s dive in, and see why an Aurora stock turnaround remains a long-shot.
Two Catalysts Could Save Aurora Stock
With debt piling up, and the cash burn continuing, what can save Aurora stock? The company needs to act fast, in order to avoid further deterioration of shareholder value. Aurora has a two lifelines in its corner to help give it a fighting chance.
First, Aurora seems to be having success focusing on the edibles/vapes side of “Cannabis 2.0.” According to Cowen’s Vivien Azer, Aurora’s edibles sales are beating expectations. Vape sales have been meeting projections as well. Given that vape sales have yet to be legalized in Alberta and Quebec, we may have yet seen this product’s full market potential. It’s not easy to say the same for the recent news from Canopy Growth.
Second Aurora’s billionaire activist investor turned strategic advisor Nelson Peltz has a proven track record fixing consumer products businesses. Peltz may be working behind the scenes, but he’s yet to help the company find a strategic partner or CEO who could help steer Aurora to profitability.
This catalyst remains a disappointment, but perhaps Peltz’s talents turning around food and beverage names doesn’t translate to pot companies. Yet, until he resigns, Peltz remains a potential factor.
Aurora stock is down, but not out. However, when considering the company’s balance sheet, concerns remain. Plus, shares continue to be valued as if Aurora is a high-flyer, instead of a company in financial distress.
What Could Send Aurora Shares Even Lower
“Cannabis 2.0” sales may give Aurora stock a fighting chance, but a pathway to survival (let alone success) remains unclear. Many analysts are skeptical Aurora can continue to meet covenants on its debt. Recent asset sales and cost-cutting may be too little, too late.
Piper Sandler’s Michael Lavery believes Aurora’s cash outflows will continue int0 2021. Lavery estimates the net cash burn could be C200 million, or about $151 million.
Where is Aurora going to raise this money? With issues involving its debt covenants, the company needs an equity infusion. What does this mean for Aurora stock? A dilutive equity offering would send shares lower. Perhaps to Lavery’s price target of $1/share.
With this in mind, there’s good reason why investors give Aurora a discount to peers like Canopy. Aurora stock trades for 4.2 times FY21 (ending June 2021) sales. In contrast, Canopy shares trade for 14.3 times their FY21 (ending March 2021) sales. As this Seeking Alpha contributor noted, Aurora’s valuation does not account for the company’s distressed situation. Aurora also has millions in planned capital expenditures through the end of FY20 (ending June 2020).
The company may find a way to survive. But not without a high chance of additional downside in Aurora stock. A turnaround could be in the cards. But buying now at around $2/share may not be the best buying opportunity.
Steer Clear of Aurora Stock
“Cannabis 2.0” may eventually move the needle for Aurora stock, but does the company have enough cash to survive until it reaches profitability? The situation remains unclear. What’s clear is Aurora’s need for capital. With troubles surrounding its debt, the company likely needs a capital infusion.
Paying $2/share for Aurora stock today looks foolish. The odds of shares heading to $1 seem greater than the stock rebounding to $5 or even $10/share. Yet, I wouldn’t count out a short squeeze. The company is estimated to release earnings in a few weeks. If Aurora can show improved results, shares could skyrocket as shorts cover positions.
Bottom line: stay away from Aurora stock. Whether on the long side or short side.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
