Aurora Cannabis (NYSE:ACB) has been on a long, steady decline for the last 12 months. And a reverse stock split will be like putting lipstick on a pig at this point. It will however keep Aurora stock listed, for now. I use the pejorative “for now” because the company’s balance sheet is a mess.
Aurora stock is the number one choice in the category of “Stocks under $25” on Robinhood. As recently as last summer, it was the most popular stock on Robinhood by a sizable margin. I suppose that’s why it draws the interest of InvestorPlace readers. And there are no shortage of articles outlining the messy state of affairs for Aurora Cannabis.
Wayne Duggan writes why buying Aurora stock is like buying a lottery ticket. And Matt McCall explains why the company’s reverse stock split may be the right thing to do, but still won’t make the stock a buy.
So, I’d like to take the focus off of the company’s debt and put it solely on revenue. Because that’s where Aurora is having a problem that they can only hope is temporary.
Canada Says Cannabis Shops Are “Non-Essential” Businesses
As it turns out, cannabis is legal, but in terms of access, it’s still a non-essential business in Canada. You can go to your grocery store and buy alcohol. In fact, in many states, shuttered restaurants can sell alcohol directly to consumers with curbside delivery. What a world.
But the same is not true for cannabis. Cannabis stores in Ontario cannot have walk-in customers. However, they can accept phone or online orders.
This is a blow to a fledgling industry. Ontario is Canada’s largest province, accounting for approximately 40% of the population. This was the market that companies like Aurora was depending on in order for their business to take off. Losing in-store sales, even if stores can open soon is still a significant blow.
My colleague David Moadel writes that curbside delivery may be a catalyst for Aurora, but ask any restaurant in the United States how that’s working out for them. And that’s a behavior that’s already established.
And second, although the province has begun to work through its bottleneck of dispensary licenses, there are still only 52 licenses granted. Since Ontario, by some projections, could easily accommodate 1,000 stores, the Covid-19 pandemic is just another delay.
The Competition Is Hiding in Plain Sight
The lack of access to its customers makes Aurora stock about as attractive as an airline stock. But with an airline, the conventional wisdom is that demand will come back once the pandemic is over. With cannabis, it’s a little tricky. Is demand going away? Probably not, but it is shifting back to the black market, if it ever left.
Aurora, like other cannabis companies, faces the fundamental problem of being more expensive than black market cannabis. It’s one reason that cannabis stocks have failed to gain traction even as the Canadian market has fully opened up.
I’m sure Aurora has a value proposition regarding the quality and safety of its product. But if customers don’t appreciate that value, then this is simply a race to the bottom. And ultimately, that’s a race they can’t win.
Aurora Stock May Be Left Without a Chair
I’m a broken record when it comes to cannabis stocks. I firmly believe that, in the long run, the cannabis sector will be enormously profitable. And much of that will do with the medicinal marijuana market.
But just like all emerging sectors, not every cannabis company that broke through the door will have a seat at the table. And increasingly it’s looking like Aurora Cannabis may be left out of this game of musical chairs.
The reverse stock split is set to close on or around May 11. That may be about the time when Canada’s economy begins to reopen. A lot of things have to go right, but there is a path for Aurora Cannabis. That path is narrow though, and failure is more likely than success. So, go ahead and browse, but it’s best not to buy Aurora stock until you start seeing sales.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing Chris Markoch did not hold a position in any of the aforementioned securities.
