For the owners of Aurora Cannabis (NYSE:ACB) stock, it’s been a difficult ride. Aurora stock has been in free fall for more than a year.
The plunge has been so steep that the company had to execute a painful reverse split to remain listed on the New York Stock Exchange. On a split-adjusted basis, Aurora stock is down from a 52-week high of $97 to less than $16 now.
While the shares have bounced back a little in recent weeks, the company still has massive problems. As a result, it continues to aggressively reduce its operations and ambitions. It’s been selling off its property such as its greenhouses to raise cash and cut its overhead.
Aurora just made a big move. Marking the end of an era. Aurora Cannabis on Wednesday announced that it was dumping its huge stake in Alcanna (OTCMKTS:LQSIF). Aurora suffered a massive loss of 110 million CAD , or 80%, on the deal.
Controlling the Distribution Network
Back in 2018, Aurora Cannabis invested more than 100 million CAD in a chain of liquor stores called Liquor Stores NA, which subsequently renamed itself Alcanna. Using warrants, Aurora later boosted its stake in Alcanna to 23%.
Aurora Cannabis thought that Alcanna, based in the Canadian province of Alberta, would enable it to enter the retail marijuana market more quickly than its competitors.
Further, the deal gave Aurora access to a proven operator that knew how to deal with regulatory issues and how to run stores which sold controlled substances.
And Aurora initially had focused heavily on Alberta, so there appeared to be clear synergies between the companies. Finally, Alberta’s history of fairly loose regulations on alcohol made it a natural focus for Aurora’s Canadian retail marijuana business.
Why the Strategy Didn’t Work
Alcanna has suffered from two major problems over the past couple of years. First, its retail liquor business has gone into a tailspin. Until 2016, the Alberta liquor stores were highly profitable and generated a ton of cash.
However, the oil crash caused a steep recession in Alberta. Crucially, many oil workers left the province in search of greener pastures. Alcanna’s liquor stores have struggled to return to profitability, thus eliminating key cash flows that were supposed to be used to open marijuana dispensaries.
Due to a combination of factors, including operating losses and licensing issues, Alcanna has not opened many cannabis stores. Since the first quarter of 2019, it has only opened 26 such stores, leaving cannabis as a tiny portion of its overall revenue.
And, alarmingly, the company reported that the same-store sales of its first batch of marijuana stores have already started to decline thanks to the launch of competing locations.
While Alcanna could still turn things around, the acquisition clearly did not go as Aurora had hoped. It made sense for the firm to try to establish vertical integration, but the strategy just didn’t pan out.
Alcanna’s shares tumbled from around $10 to as low as $1 during the market crash before reaching $2.80 now. Aurora gets credit for not selling the chain at its absolute lows in March, but it’s still taking a large hit on its investment.
The Verdict on Aurora Stock
I’ve always admired Aurora for trying to build a global cannabis empire so quickly. It took a ton of audacity to attempt to manage so many operations around the world that were assembled in such a short period of time.
If the company had been able to pull off its strategy, it could have rewarded its shareholders to an unbelievable degree. Even more impressively, Aurora tried to make the strategy work on its own. It never recruited a key strategic backer like Cronos (NASDAQ:CRON) and Canopy Growth (NYSE:CGC) did. As a result, the owners of ACB stock would have obtained higher profits if the strategy had worked.
But it didn’t. The supply of cannabis was simply too high, and there was not enough demand for legalized cannabis. Further, there were many unexpected hassles, such as overly tough regulations in Ontario. As a result, the business has taken longer to develop and has been less profitable than expected.
Sadly, Aurora’s clock is running down. It shot for the stars, and now it has burned out. The sale of Alcanna is another sad indication of the company’s decline.
With Aurora selling off assets in order to survive this lean period, expect ACB stock to keep trending lower. It is fighting for survival, and its shareholders should expect it to face many more challenges.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.