Aurora Cannabis (NYSE:ACB) stock has been on a terrifying roller coaster since its 2018 debut on the New York Stock Exchange. Since rocketing to a peak enterprise value of $15.7 billion, ACB has since wiped out 93% of shareholder money as profits have failed to materialize.

On Tuesday, investors received another dose of bad news when ACB announced a massive $1.4 billion write-down of old acquisitions. Shares slid 12% on the news. Yet, ACB stock remains the 11th most popular holding on Robinhood, a popular trading app, as speculators cheer Aurora’s news of its new CEO.

But investors shouldn’t hold out hope.

It’s certainly not a sound investment strategy, no matter how much you love pot. That’s because, as soon as the U.S. government federally legalizes marijuana, Aurora’s grower-centric business model will make it a slow-moving target for nimbler firms.

Here’s why Aurora Cannabis stock is on a slow death march to zero.

ACB Stock: Great Industry, Bad Business Model

Every several years, a new industry emerges that promises 1,000%-plus returns. Legalized marijuana is one of them.

And these are precisely the industries I love.

In many cases, like e-commerce and cloud computing, these industries DO deliver. Amazon (NASDAQ:AMZN) has returned 200,000% to investors since its 1997 IPO.

But a great industry doesn’t guarantee investment success. In 1999, a survey by UPenn counted no fewer than 1,100 major e-commerce companies. By 2004, that number had collapsed to just 31. You would have needed extreme luck or skill to scoop up winners from that pile of wreckage.

But while it’s often hard to pick the big winners, it’s usually easy to see the obvious losers.

Here’s one example. In 1999, Medicineonline.com launched its website Bidforsurgery.com, bringing an eBay-like bidding system for surgical procedures. Patients would submit anonymous requests for surgeries, and the cheapest doctor would get the contract. Sounds like a questionable investment?

And skeptical investors would have been right to stay away. Bidforsurgery.com closed not long after realizing no doctor would risk losing their medical licenses over rock-bottom pricing.

Today, Aurora Cannabis also finds itself on the same losing side of history. Its decision to focus on cultivating marijuana might have seemed like the obvious path into the pot industry. But its overemphasis on production over marketing has left it with a broken business model that will doom the company.

As ACB looks towards bankruptcy in the next 18-24 months, here’s what happened.

Aurora Meets the Lousy Farming Business

As attractive as marijuana growing sounds, it’s still an agriculture business.

And most farms have one thing in common: relatively uninspiring returns.

Why? Farming has high capital requirements and few barriers to entry. An American soybean farmer doesn’t just compete with his or her next-door neighbors. He’s competing against Brazilian and Chinese farmers as well. And in this highly commoditized business, return on assets from income rarely breaks 2.5% in any given year.

That’s why all major tobacco companies like Phillip Morris (NYSE:PM) and British American Tobacco (NYSE:BTI) don’t bother growing their own tobacco. Instead, they’re happy to buy tobacco on contract at just $2.98 per kilogram. Each cigarette, after all, holds only 1 gram of tobacco.

So where does big tobacco’s real riches come from? Sales, distribution and marketing (and taxes, in the government’s case). The average pack of cigarettes costs $5.51, with customers in many states happily (or sullenly) paying closer to $10.

The tobacco industry’s focus on marketing has paid off; profits at cigarette companies are staggering. Phillip Morris, Marlboros’s maker, generates a 160% return on invested capital (ROIC). That’s roughly as high as Apple’s profit margins.

Did ACB Follow Big Tobacco’s Lead?

Unfortunately, no.

Instead, Aurora decided to jump into farming. At its peak in 2019, Aurora operated 18 different growing facilities across four countries. And its income statement has all the signs of a bad agricultural firm.

In Q3, the company produced 36.2 tons of cannabis but sold just 12.7 tons. (Keep in mind, stored marijuana lasts only 6-12 months). Even if the company managed to sell 100% of its production at current prices, gross profit of $82.2 million would have fallen short of its $110 million overhead costs.

The company has since “retired” that CEO, Terry Booth, amidst “sweeping changes.” And on Tuesday, the company announced Altria veteran Miguel Martin would take over the CEO role. But it might be too late for the cash-strapped firm.

Aurora’s Costs Still Far Too High

In a paper by the RAND Drug Policy Research Center, a centrist think tank, Jonathan Caulkins made some marijuana cost estimates. If legalized, he concluded, the cost to produce one pound of commercial-grade marijuana would fall from $225/pound to just $2.50/pound. That’s because, as a crop, there’s little difference in planting lettuce, asparagus, or sinsemilla (a marijuana variety with high psychoactive content)

And what if prices follow those of industrial hemp? Production costs could plummet to under $1/pound.

These prices would spell disaster for Aurora Cannabis.

According to its most recent filings, the ACB spends 2.90 CAD to produce just 1 gram of marijuana, or $1,315/pound. Adding overhead costs makes a total of almost 6 CAD per gram (or $16 per eighth of weed). Even in the illicit U.S. market, those are incredibly high prices for the wholesale market.

Why are costs so high? Firstly, that’s because Aurora focuses on higher-grade marijuana strains, something its recreational users don’t seem to care for. Secondly, the company produces in Canada, where they’re forced to use expensive indoor facilities. Indoor growing costs run about ten times higher than outdoor ones.

This spells huge trouble for Aurora. Once (or if) pot legalization happens in the U.S., investors can be sure that cheap imports will quickly replace Aurora’s high-cost production.

ACB on the Brink of Bankruptcy

Aurora might yet figure out a marketing plan. But investors won’t have much time to wait.

In March, the company reported $230 million on its balance sheet. Though the interim CEO has quickly shuttered a dozen plants and laid off 25-30% of its staff, the cuts might not hit deep enough.

That’s because the company also has 128.6 million CAD in current liabilities, which includes leases due this year. Even with planned cutbacks, the company’s burn rate could still top 250 million CAD every year.

In years past, Aurora plugged its cash flow gap by issuing new shares. Today, the company won’t be as lucky. With an 86% decline in share value in the past twelve months, the company will cut far deeper in diluting current shareholders.

What’s ACB Stock Worth?

Marijuana stock investors have long hoped that the U.S. House and Senate would eventually pass federal pot legalization rules. And if legalization happens before Aurora goes bankrupt, investors can be sure of spectacular short-term gains.

But, if ACB continues down its current path, the company will eventually fail as low-cost imports bite. In the commoditized world of farming, it’s a race to the bottom. And ACB stock investors will get taken on that ride.

On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.