Investing in the cannabis sector remains a speculative and risky bet but as consolidation unfolds, the stronger players might pay off. When shares of Aurora Cannabis (NYSE:ACB) fell below the key $1 level, it might have mark an end to the downtrend. The company has a plan to increase its financial liquidity. So, reverse-splitting the stock to keep its listing may help Aurora stock survive the ongoing selloff in the cannabis sector.
Aurora posted a few weeks ago its plans on increasing its financial flexibility in response to the elevated economic uncertainty. The 205 million CAD in cash remaining included the $400 million raised from the at-the-market (ATM) offering program announced last year.
But to strengthen its balance sheet and ensure continued access to equity capital, it will renew the ATM program. Aurora does not have the luxury that Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC) enjoy. The latter firms have investments from Altria (NYSE:MO) and Constellation Brands (NYSE:STZ), respectively.
And so, Aurora needs to tap the public markets to increase up to $350 million. Strengthening the balance sheet will allay fears of bankruptcy or a cash crunch as the new coronavirus weakens the economy.
Aurora also said that its cost cuts are on target. The lower selling, general, and administrative cost reductions and lower capital expenditures should align with falling revenue. That should stop the company from suffering from more losses.
The company expects SG&A costs in the range of 40 million CAD to 45 million CAD a quarter as it exits fiscal fourth quarter of 2020. It will achieve this by reducing unnecessary complexities in its business. Needless to say, a culture of financial discipline will go a long way in driving the company toward profitability.
Working Through Pandemic
Aurora’s facilities in Canada and internationally continued full operations. Thanks to the government categorizing the business as essential, Aurora continued its business activities while staff practiced social distancing. The company also implemented extra health screening of its employees to keep all staff safe.
Customers, many of whom are following the stay-at-home government order, may have increased orders of cannabis products. When Aurora reports quarterly results in a little over a week from now, investors may find the company reporting improving revenues.
The rollout of 2.0 is improving after the company solved operational issues such as packaging. It is now positioned to get the product to the customer. Still, Aurora needs to operate at a point where it is not producing around 50,000 kilograms more than it sold, as it did in Q2 2020.
It needs to have a better understanding of the pace of the store rollout in Canada and then match supply with demand levels. Plus, Aurora needs to drive higher revenue while operating at lower SG&A levels. It said on the conference call that “we are aiming to being prudent with our cost structure that allow us to be profitable on the entire journey as opposed to hoping for doubling of revenues to become profit[able] or not.”
InvestorPlace market analyst Luke Lango thinks that Aurora’s business will rebound in the second half of the year. But he also prefers CRON and CGC stock more.
Investors should expect Aurora to get better control on costs first. As it achieves operational efficiency and it keeps inventory levels low, profits will come next.
Fair Value and Your Takeaway
Analysts have an average price target of $1.69 on Aurora stock (per Tipranks). The stock is a wait and see until the company reports higher margins. Until then, speculators may continue trading its volatility and holding for the long-term when prospects improve.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, the author did not hold a position in any of the aforementioned securities.