Last week was a big one for Aurora Cannabis (NYSE:ACB), to say the least. Aurora stock soared after the company reported a big earnings beat on May 14. Just days later on May 20, the company announced a buyout deal for U.S. CBD retailer Reliva.
Last month, I said Aurora stock has “tremendous upside” given its positioning in the Canadian cannabis market. However, I said the stock could only realize that upside if it can prove to investors it’s not a complete financial mess.
Quarter after quarter, the company failed to prove that point. However, it has done more to make its case as a potential long-term home run investment in the past week than it did over the past year.
The Earnings Numbers for Aurora Stock
First, let’s take a look at what was so good about Aurora’s earnings. Aurora reported a fiscal third quarter loss per share of $1.37, significantly worse than the 76 cents analysts had been expecting. However, its cash burn dropped by 40% to just $154 million.
Aurora also reported $53.8 million in revenue, up 18% in a difficult market.
The cash burn progress is a big step in the right direction for Aurora. Its biggest problem has been cash burn and the dilution associated with raising capital to fund its growth.
But Aurora said it remains on track to report positive earnings before interest, taxes, depreciation and amortization (EBITDA) by the fiscal first quarter of 2021 in September. That’s a huge relief for investors. I still believe Aurora has a lot to prove between now and September to hit that target. But it at least provided a potential light at the end of a very long tunnel toward profitability.
On top of that reiterated profitability guidance, management also provided some bullish color on the company’s new $250 million equity facility. When the facility was announced in April, it represented roughly 30% dilution for investors.
However, Aurora management said the new facility is only a “backstop” and should not be necessary if it hits its financial targets. Aurora also said it has only used about $5.6 million of that $259 million so far.
The Reliva Deal
In addition to the positive commentary on profitability and the equity facility, the Reliva buyout is also reassuring to Aurora stock investors. A month ago, Aurora looked like a company on its financial deathbed. It was raising capital at the expense of massive dilution. It even approved a reverse stock split, the scarlet letter of many companies circling the drain.
However, in a follow-up to the positive earnings report, Aurora just announced it is entering the U.S. CBD market with a buyout of Reliva. On the surface, Reliva isn’t a big deal. The company generated only $14 million in sales over the past year. Aurora paid just $40 million in stock to complete the deal.
But the biggest takeaway for me is that companies in extreme financial distress don’t typically make acquisitions. Without knowing much about the specifics of Reliva’s business or Aurora’s long-term U.S. strategy, just the fact that the deal happened is a positive sign.
Cantor Fitzgerald analyst Pablo Zuanic says it’s a sign that Aurora can “chew and walk at the same time.”
“Certainly, the consumer CBD industry faces temporary challenges in the US, but the industry has long-term upside, valuations have pulled back, and we think Reliva has a unique channel and price positioning that allowed it to perform quite well pre-COVID,” Zuanic says.
How to Play Aurora Stock
Given the crazy price action in Aurora stock in the past week, investors are likely asking several questions. The first question is, “Have I missed the Aurora rally?” I say investors on the sidelines aren’t missing the train.
Yes, the stock has tripled in a matter of days. But it is also still down 13% overall in the past three months and 83% in the past year. It could double again from here and long-term investors would still be buying the dip.
But for traders looking for a good near- or medium-term entry point, I’m cautious about buying now. Aurora stock has a short percentage of float of 23%, according to S3 Partners. That’s an extremely large short position. I don’t know how that short position has changed in the past week. But if I were buying here, I’d be concerned that much of the parabolic move has been driven by short covering rather than new buyers.
I still see Aurora stock as much more of a lottery ticket play on cannabis than Canopy Growth (NYSE:CGC) or Cronos (NASDAQ:CRON). However, there’s no question Aurora’s bull thesis got a lot stronger in recent days.
If you’re willing to stomach the volatility and risk, Aurora stock still has tremendous long-term upside.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan was long CGC stock.