Sputtering from $100 a share to $6 within the span of a year, Aurora Cannabis (NYSE:ACB) stock tested the resolve of investors. Then came the month of May, and a price-action roller-coaster ride ensued.
Daily moves of 20% or more were not atypical in this month. This was particularly unusual as the other well-known pot stocks weren’t behaving this way. As the dust settles, prospective investors need to get a handle on what’s happening before they can make an informed decision.
Perhaps you’ll find that the swift but wobbly ascent from $5 and change to $16 was fully justified. After all, Aurora stock has been much higher than that. But do recent developments suggest that the stock’s momentum is sustainable?
Not Great, but Good Enough
Making post-earnings share price gains isn’t necessarily closely connected to the actual fiscal health of the company. That might sound counterintuitive, but it’s an essential concept for stock traders to know.
Whether a stock goes up or down after an earnings announcement is primarily a function of whether the data beats or misses the expectations of analysts and the investing community as a whole.
After the unexpected resignation of Aurora Cannabis founder Terry Booth from the company’s CEO position, investors’ spirits were low. Booth had been a mainstay at the company and at the time, it felt as if the company was losing its way.
It also didn’t help that Aurora was in the process of laying off 500 employees at around that same time. And this was in early February, just before the novel coronavirus rattled the global economy.
On top of all that, Aurora released earnings data for the December quarter and it was disappointing, to say the least. The company’s cannabis sales declined roughly 10% sequentially while net sales for December dropped below 54 million Canadian dollars ($39.2 million).
That’s unsustainable for a company with overhead costs of around CA$100 million. Hence, the bar was set quite low for the September quarter’s earnings results. Analysts expected revenues of CA$66.7 million while the actual result was CA$75.5 million.
Things Get Complicated
A 12-for-1 reverse stock split forced traders to make some mental adjustments, but the price took off after the earnings numbers were released.
Quarterly revenues of CA$75.5 million isn’t great for Aurora, but with expectations set so low, anything less than horrible was considered acceptable. For instance, MKM Partners analyst Bill Kirk deemed the earnings report “a step in the right direction.”
Also of significance was that Aurora stock remained above $1 per share. That meant it would avoid being delisted from the New York Stock Exchange, at least for the time being.
Despite the seemingly positive earnings surprise, not everyone is feeling bullish on Aurora stock. In fact, analyst firm Jefferies recently downgraded the stock from “hold” to “underperform.”
At the same time, however, Jefferies analyst Owen Bennett raised his price target on Aurora stock from CA$12 to CA$14. With that, Bennett commented that the stock is “still set up well longer-term but we see give back in the price over the next few quarters as likely.”
This assessment came in the wake of Aurora’s acquisition of U.S.-based CBD company Reliva. The acquisition could turn out to be a profitable one in the long term.
Indeed, it’s the push into the U.S. CBD space that ought to be considered bullish. It is true that the earnings blowout garnered the lion’s share of traders’ attention. Yet it’s the potentially lucrative CBD market that could drive consistent profits for Aurora going forward.
The Takeaway on Aurora Stock
There’s a lot to unpack here and there will continue to be robust debate and swift price moves in Aurora stock. Long-term, though, there’s the potential for strong gains if the company’s latest CBD gambit pans out.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
