Aurora Cannabis (NYSE:ACB) has been steadily declining for the past year, with Aurora stock going from $9.50 to 82 cents a share. The market capitalization is now at about $923 million.
I think it’s really tough to be optimistic here, even though the novel coronavirus has likely resulted in higher demand for cannabis.
We’ve seen something similar happen to alcoholic beverages, as shares in companies like Anheuser Busch (NYSE:BUD) and Molson Coors Beverage (NYSE:TAP) have both posted recent gains.
But for Aurora, there is a problem: the retail operations in Ontario. This provenance has always been a problem, as the government has dragged its feet in issuing permits. Moreover, the cannabis retail industry was not deemed as essential when the coronavirus shutdowns were announced. In other words, there could be a hit to the revenue line for Aurora.
Although the shutdown was expected to last until April 18, as we’ve seen in the U.S., deadlines are often extended.
And what about eCommerce sales? This may help, but it is far from clear if this will compensate for the loss of the brick-and-mortar channel. About a quarter of Canada’s recreational cannabis sales come from Ontario.
The Financials and Aurora Stock
Even before the coronavirus, Aurora was already having problems with its core business. Just look at its latest earnings report.
Revenues came in at 56.03 million CAD. The Street was looking for a more robust 60.5 million CAD. What’s more, Aurora lost an enormous 1.3 billion CAD! While a big part of this came from non-cash impairments, the fact remains that the business keeps deteriorating.
The balance sheet also is far from strong. The company expects that liabilities will be over 373 million CAD while cash and cash equivalents are only about 156.3 million CAD.
Aurora is restructuring operations with layoffs and other cost-cutting measures. The forecast is that the annual run-rate for SG&A expenses will be $40 million to $45 million by the end of the fiscal fourth quarter. However, there may be a need for even more cuts.
It also does not help that there has been considerable drama within the executive ranks. In early February, Aurora CEO and co-founder Terry Booth resigned from his position. Then, in mid-March, he unloaded 12.16 million shares on the open market.
Interestingly enough, Jefferies analyst Owen Bennett called it “not great for sentiment” about Aurora stock. This is an understatement as the large sale casts serious doubt on Aurora’s prospects.
Bottom Line on Aurora Stock
Despite all the problems, I still think there is opportunity in the cannabis space. There is certainly strong demand and more countries will legalize the commodity in the coming years. But given the tough environment right now, investors need to be selective. And for the most part, Aurora stock is just too risky.
Instead, the better approach is to focus on those companies with rock-solid balance sheets, such as Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON). Basically, cash is king right now – and these operators have substantial liquidity to not only survive but benefit from the consolidation opportunities.
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.
