Marijuana companies have struggled for quite awhile, but that hasn’t stopped people from buying the shares of Aurora Cannabis (NYSE:ACB). Indeed, the daily trading volume of ACB stock remains robust despite the shares’ relentless decline.
The sentiment towards ACB stock was much more optimistic in October of 2018, when Canada legalized recreational cannabis for adults. At that time, Aurora was considered a giant in the cannabis sector.
Today Aurora is still a respected name, but hard times have made it difficult for the company to demonstrate its value to shareholders. Nevertheless, the company has a devoted following on social media, and the stock’s bulls refuse to admit defeat.
And perhaps they’re right to hang on to their shares. As the old saying goes, investors don’t lose money on stocks until they sell their shares. For those considering buying Aurora, though, it might be wise to wait until more favorable conditions arise, both for the firm and for the weed market generally.
A Closer Look at ACB Stock
The most recent multi-year peak of ACB stock occurred in March of 2019. For a brief moment, traders bid the share price up to the $115 level.
After that, the stock started a painful descent, cascading down to the $24 area by February of this year. Then came the onset of the novel coronavirus, which roiled the stock market and brought Aurora’s shares to their 52-week low of $5.30.
Next, in a vicious head-fake, traders quickly pushed ACB stock to $17. But the sense of relief wouldn’t last long. With the shares closing at $9.41 on Aug. 21, it was clear that the bears were back in control of the price action.
Yet, even after that retreat, the stock’s trailing 12-month price-earnings ratio was 43.56. This suggests that the value of the stock isn’t compelling. And the shares are likely to decline further this year unless Aurora can generate stronger earnings.
Tough Numbers
Aurora’s most recently reported quarterly data is from the company’s fiscal third quarter. The quarter ended on March 31, so it reflects some but not all of the coronavirus’ impact.
The numbers that Aurora provided weren’t encouraging. With a quarterly net earnings loss of 137.4 million CAD, Aurora didn’t show a vast improvement compared to the net loss of 160.1 million CAD it reported during the same quarter of the previous year.
Moreover, at the end of its Q3, Aurora had 613 million CAD of long-term liabilities. That’s more than double the revenue that the company generated over the 12 months that ended in March.
Frankly, it’s hard to envision a sustainable turnaround for Aurora until the company’s data shows more improvement. When there’s a better balance between Aurora’s earnings and liabilities, investors will have a green light to raise the ACB stock price over the long-term.
A Slow-Growth Scenario
Aurora can’t be blamed for issues that are facing the entire cannabis industry. Along with the spread of the coronavirus, the sector’s persistent problems include an oversupply of cannabis, the disappointing rollout of edibles and other derivatives in Canada (where they were recently legalized) and a somewhat surprising expansion in black-market activity.
Hill+Knowlton Strategies’ Omar Khan provides further detail on how the underground cannabis market has thrived amid the decriminalization of the drug:
“The illicit market faces no costs related to regulatory oversight and is intentionally lowballing prices in order to retain market share … combined with their ability to offer greater product variety and the slow rollout of licensed retail stores across Canada, [this] gives them a competitive edge with respect to the legal market.”
It won’t be easy for Aurora to compete with both black-market pot purveyors and legal behemoths like Canopy Growth (NYSE:CGC) and Aphria (NASDAQ:APHA).
Unfortunately, Aurora only managed to sell approximately 13,000 kilograms of cannabis in Q3. That doesn’t bode well for the company at a time when its competition is intense and the industry is struggling.
The Bottom Line on ACB Stock
Even with the company’s challenges, it’s perfectly OK to keep ACB stock on your watch list. Timing is essential, though. Before buying the shares, investors should wait until Aurora and the cannabis industry in general show signs of improvement.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
