Lately some cannabis stocks are showing improvement like Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON). But these are really outliers. The market remains fairly rough right now. Just look at Aurora (NYSE:ACB) stock. Since September, shares of Aurora stock have gone from $6.50 to $1.57.
Of course, a key reason for the grueling drop is that the Canadian market opportunity was overhyped.
Keep in mind that there have been nagging problems with the permit process to launch retail outlets. And in the meantime, black market activities have taken a toll. In other words, the Canadian authorities have proven to be far from proactive.
But the deterioration of Aurora stock has also been due to management issues. Let’s face it, the skillsets for the startup phase – which requires much risk-taking and innovation– are usually not right for when a company starts to mature, and this is where Aurora is now. The company needs a CEO who has hands-on-experience with building strong infrastructures and how to scale products.
Interestingly enough, with CGC, we’ve seen this type of leadership transition. The former CEO, Bruce Linton, was standout in aggressively building the company. But his largest investor, Constellation Brands (NYSE:STZ), stepped in when he started to falter. The result was that STZ’s executive vice president and chief financial officer David Klein was brought in.
So might we see something similar with Aurora? I think so, actually. Yes, the company’s founder and CEO Terry Booth has departed and the interim replacement is Executive Chairman Michael Singer. For the most part, it does look like Aurora is looking for someone with a solid background in operations.
Yet Singer is not wasting any time making changes. In his earnings call, he was very clear in his goal is bringing fiscal discipline to the company. To this end, Singer has initiated layoffs and cost-cutting. The goal is to get to reduce expenses by $40 million to $45 million to reach EBITDA profitability by the fiscal fourth quarter of this year. He has also amended the credit facility to provide more flexibility.
Other Positives
To get Aurora back on track, there will certainly need to be more than just cost cutting. There will also need to be more growth on the top line.
And I think this could be the case for 2020. Part of this will likely come as the Canadian government allows more retail locations to emerge and cracks down on black market activities. There should also be less competition for Aurora as marginal operators shutdown.
Then there is the Cannabis 2.0 movement, which is the legalization of edibles and beverages in Canada. The market could easily be worth over $2 billion in the next couple years.
The good news for Aurora stock is that the company is positioned to benefit. Here’s what Singer said on the earnings call:
“We began loading-in small volumes in Q2 2020 with positive market feedback from distributors and retail customers about our product quality. Those products include vapes, concentrates, gummies, chocolates, mints and cookies and they are available in markets across the country. We have selectively partnered with a variety of organizations, prioritized our resources and built the inventory to ensure that our consumers across Canada will have access to our high-quality derivative products.”
Bottom Line on Aurora Stock
Besides Cannabis 2.0, there are other catalysts that should gin up buying for Aurora stock in the coming months.
For example, we’ll likely see an announcement of a new CEO as well as improvement on the bottom line, and there is the possibility for a strategic alliance with a consumer products company. Keep in mind that Nelson Peltz, who is a renowned activist investor and has taken positions in companies like Procter & Gamble (NYSE:PG), Mondelez (NASDAQ:MDLZ), and Wendy’s (NASDAQ:WEN), is a strategic advisor to Aurora. He could certainly be critical making key introductions.
So while the risks remain considerable, Aurora stock could be an interesting speculation.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.
