An old proverb says patience is a virtue. Aurora Cannabis (NYSE:ACB) may be questioning the wisdom of that proverb. The Canadian cannabis company has been patiently waiting for the cannabis revolution to unfold. Unfortunately, it’s still waiting, boding poorly for Aurora stock.
There are many reasons why the cannabis industry has not yet achieved its promise. And there are many (this writer included) who still believe this will be an industry with high-growth potential. In time.
But time is exactly the problem for Aurora stock. Simply put, the company needs cash, but they are running out of time. There are some estimates that the company may be out of cash in two months. They are in the hunt for a new CEO. And they may even take the draconian step of issuing a reverse stock split.
Any way you view it, time is not on the side of Aurora Cannabis.
Did the Cannabis Sector’s Bubble Already Pop?
Back in 2018, cannabis stocks got decoupled from reality. The hype about Canada legalizing marijuana made speculative investors giddy. Of course, that’s how bubbles form. But at the end of 2018, reality set in. The Canadian regulators were taking their time approving retail licenses. The fundamentals of supply and demand were all out of whack.
Still, the thought was that this was just a waiting game. Once the derivatives market opened up in Canada (known as Cannabis 2.0), the revenue would start to flow. But the early returns on Cannabis 2.0 are coming in below expectations.
This is leading some to start citing the flaws in the cannabis model. My colleague Larry Ramer wrote about the challenges that cannabis companies are facing. While I can’t disagree with the results to date, I still think U.S. legalization of cannabis is still a matter of when, potentially opening new doors.
Although they are called “pot stocks,” the allure of the sector was never based on the idea that head shops would pop up like Starbucks (NASDAQ:SBUX). The hope was in the many derivative uses of marijuana, particularly the CBD form of the plant. This was supposed to be especially evident in the legalization of medical marijuana. That is an area where Aurora has a significant advantage. However, that also appears to be elusive.
Now, Ramer also points out that the FDA announced over the summer that “CBD can harm you.” The potential side effects were liver damage and gastrointestinal problems. I don’t mean to be flippant, but ibuprofen can do the same thing, as can a number of other prescription drugs.
And that gets to the heart of the matter. What the FDA was really railing against was the lack of scientific information. That puts CBD in the same category as fish oil and bee pollen. While it’s not a desirable place to be, it doesn’t mean it can’t get approved in the United States. It may just take more time.
Time Is Running Out on Aurora Stock
And the issue of time brings me back to where I started this article. You can love the future of the cannabis sector and hate some particular cannabis stocks. That’s my take on Aurora stock.
The company missed badly in terms of earnings and revenue in its latest earnings report. And it appears that right now, the only thing investors are holding onto is time. Aurora announced that it had renegotiated some of its debt covenants. The company now has until the end of its fiscal 2021 quarter (ending in September) to post profitable earnings before interest, taxes, depreciation and amortization (EBITDA).
The ability to enter the U.S. market would be an immediate catalyst for Aurora stock as well as the stock of any cannabis company. But at the moment, the company’s financials are so weak that it would be hard for the company to enter the market in any meaningful way.
Which means that for Aurora to become profitable in the next year will mean the Canadian market has to start delivering big time results. Many analysts are predicting the Canadian market will show growth as more retail stores open for business, particularly in Quebec. However, delivering the revenue that Aurora needs may be too much to hope for.
But as Aurora continues to try to stop the clock, it faces the uncomfortable reality that progress in this sector is measured in years, not months. And that framework doesn’t suit Aurora stock well at all.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.