As Aurora (NYSE:ACB) stock hurtled towards the $1.55 price level at the start of this week, social media trading gurus are abuzz due to a prominent analyst’s downgrade. Specifically, Cowen analyst Vivien Azer changed her rating on ACB from “outperform” to “market perform,” and the market responded by giving the shares a near-7% haircut.
Aurora stock wasn’t the only one to fall, as the entire cannabis sector was a horror show. Cowen’s downgrade seemed especially untimely for ABC shareholders, though, as the price was already quite depressed.
Does all of this, then, mean it’s time to abandon ship and dump your Aurora shares?
Azer Takes Aim at Canadian Cannabis
Before assessing ACB stock’s prospects, let’s hone in on the analyst that’s taking Aurora to task.
It’s worth noting that Vivien Azer hasn’t always been bearish on cannabis companies, as back in January of 2019 she projected that Canadian marijuana sales would likely reach $3.1 billion CAD for the year. Evidently Azer’s expecting a moderate increase in marijuana sales going forward, as her projection for 2020 is $3.5 billion CAD.
Nonetheless, Azer sees a number of inopportune factors surrounding the broader cannabis market. One salient headwind, it seems, is a tendency for cannabis products to either be value-oriented (i.e., cheap so that it can compete with black market pot) or boutique-oriented (i.e., fancy and expensive). Thereby according to Azer “creating a bifurcation toward either value- or premium-priced flower with a glut of mid-priced inventory.”
The Cowen analyst also cited the disappointment of Canada’s introduction of cannabis “derivatives” (edibles, beverages, vaping products, etc.), saying, “While industry challenges around doors and high quality flower supply are well understood, we now believe that the slower than expected rollout of cannabis 2.0 products will also prove as a headwind to revenues.”
Seeing a Half-Full Glass
All in all, Azer evidently feels that the aforementioned issues facing the Canadian cannabis market “do not appear to be fading as anticipated” and that the recent Cannabis 2.0 rollout is “likely not the elixir that the market was hoping for.” From this standpoint, I can see why she would view the glass (or perhaps the bong in this case?) as half-empty.
Personally, I’d like to shake Azer’s hand for delivering us this extra-deep price dip in ACB stock. She’s 100% justified in suggesting that Aurora “right-size” the company’s production capacity, which currently is estimated to be around 120,000 kilograms. In time, I’m confident that the company will adjust its supply to the demand; shareholders should understand that “right-sizing” isn’t going to happen overnight.
I suppose I just see things differently than most folks, but I see ACB stock trading below $1.60 as a “glass half-full” moment. If someone had told me a year ago (when Aurora shares were nearly ten bucks apiece) that I could buy ACB at the current price, I would have been amazed and delighted.
Moreover, if the apparent catalysts are a cool-down of the Cannabis 2.0 hype (which, admittedly, was overblown last year) and a need to “right-size” the supply to fit the demand, I’m okay with that. These are issues that don’t sound permanent to me, and non-permanent issues are “the stuff that dreams are made of” for value investors (if you’ll permit me to commandeer a Maltese Falcon quote for my own insidious purposes).
The Takeaway on Aurora Stock
Misappropriated Bogie quotes notwithstanding, I’m prepared to counter Cowen’s expert downgrade with a decidedly amateur Aurora stock upgrade. When the dust finally settles and the cannabis-derivatives supply-demand curve hopefully straightens out, Aurora shares could bounce back sharply — and you can send Cowen a heartfelt thank-you card for the deep, fleeting discount.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
