The start of baseball spring training reminds investors of the dreaded “Mendoza Line.”
Mario Mendoza was a slick-fielding shortstop who managed a nine-year career in the majors despite hitting just over .200. That average, 1 hit for every 5 times up, is thus known as baseball’s Mendoza Line.
For investors, the Mendoza Line is $1. If a stock can’t stay above that line, it will be de-listed, thrown into the minor leagues of the market. Aurora Cannabis (NYSE:ACB) shares are getting close to this line. They opened for trade Feb. 25 at $1.58 each.
For its fiscal second quarter, reported Feb. 13, Aurora had total net revenue of $56 million, down 26% from the previous quarter. Selling, general and administrative expenses alone were nearly $100 million, up 23%.
Game Over?
Aurora reacted to the numbers as you might expect. It said it would cut those expenses by half and issued new shares to regain liquidity. That means if you have shares, they’ve been watered down. Founder and CEO Terry Booth “retired” — just two months after his lieutenant was shown the door.
The problem for Aurora, and everyone else in the legal cannabis trade, is they’re being killed by the illegal trade. Why stand in line at a pot store when Dealer McDope delivers for less?
People also won’t pay big for that high. The share of the market for “premium” pot has been cut nearly in half. Canadian buyers don’t want to pay more than $7 per gram for their stash. The wholesale price for Aurora weed is below $4 per gram. Aurora now plans to launch a low-priced line called Daily Special.
Canopy Growth (NYSE:CGC), meanwhile, grew thanks to pot paraphernalia sales (up 50%), higher sales for “medical” marijuana and pre-rolled marijuana cigarettes. Analysts pounded the table for it, bragging that it wouldn’t chase “sub-value pricing.”
All Aurora bulls could recommend, on the other hand, was “buying the dip,” which sadly doesn’t refer to pot placed in a packet between cheek and gum. Michael Singer, who answered questions during the conference call, is an interim leader.
Most analysts are downgrading Aurora stock, along with players like Tilray (NASDAQ:TLRY). Estimates on the size of the legal market are falling. The Cannabis 2.0 phenomenon, pot sold as snacks and beverages, with the CBD oil used as a pain reliever, also seems to be fizzling out.
OK Boomer
Producers now hope baby boomers, most of whom are in their 60s, will save them. The problem is even these buyers want a bargain, and they don’t care where they get it.
Producers are left hoping cops will save them, with crackdowns on illegal shops in California rising. The states, which also lose tax revenue when people buy illegal bud, are also going after growers.
Employer efforts against pot, meanwhile, work against the industry. People are still being denied jobs, or losing their jobs, if they test positive for marijuana. This dissuades many from the legal as well as the illegal market.
The Bottom Line on Aurora Stock
The only difference between legal and illegal weed is its tax status. The reason for legalization was to stop throwing pot smokers in jail, not make suits money.
Unless states like California can, in their own financial interest, cut down on illegal weed’s 80% share of the market, and increase legal sales, companies like Aurora are doomed to a slow death.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
