Marijuana legalization has been a bumpy ride, at least for investors. The cannabis market has taken longer to develop than expected, retail distribution networks in places such as Ontario have lagged, and competition has driven down profitability. Aurora Cannabis (NYSE:ACB) has not avoided these problems. In fact, ACB stock has lost the substantial majority of its value in recent years.
With the stock trending downward for an extended period, many investors have given up on Aurora. That’s an understandable reaction. But at some point, if the company still has the cash to carry on, the risk/reward starts to swing. And we’re nearing that point on Aurora. After years of pain, shareholders could finally see some relief.
While I’m turning more bullish on Aurora, don’t mistake this for a low-risk investment. Our Thomas Yueng recently made the case for why ACB stock is on a “death march to $0.” Yeung could very well end up being right. Aurora’s business model up until now hasn’t worked, and the company has piled up mountains of red ink historically. If things don’t change, the company will end up in critical condition. However, here’s why you shouldn’t give up on the company just yet.
Putting Aurora’s Losses in Context
Aurora has had a terrible September so far. The stock has lost a quarter of its value in recent weeks due to two primary factors: Bad earnings, and uncertainty around the company’s strategy. The shocker was the write-down; Aurora plans to write off almost 2 billion Canadian dollars of goodwill and intangible assets.
This will cause Aurora to report a massive earnings loss for the quarter and full-year 2020. Anyone looking at P/E ratios or net income is going to see a huge negative number for ACB stock as a result. The important thing to keep in mind is that these write-downs are an acknowledgment of past mistakes. Aurora expanded aggressively around the world, boldly taking the initiative in building a global footprint.
Regrettably, many of these moves ended up being a mistake in retrospect. However, that’s the sort of thing that happens in a new and emerging industry like cannabis. It’s hard to play your cards perfectly. Aurora made mistakes – big mistakes – but that was in a different environment. The company is retooling now and has dramatically cut its overhead. Aurora’s huge ambitions could have paid off if things had gone differently. They didn’t, hence the massive write-offs. But those are non-cash expenses, and the real question is whether Aurora’s current assets will begin to bare fruit.
New CEO Can Bring Aurora Needed Expertise
One interesting development is that Aurora has a new chief executive officer. You may recall that Terry Booth served as Aurora’s CEO from 2014 onward. However, Booth decided to retire earlier this year. Booth deserves a lot of credit for building Aurora into a major international player. Back in 2014, the idea of a global cannabis powerhouse was still hard to imagine. Booth went early, before most people caught on, and started developing Aurora’s business around the world.
Not all of these moves paid off. In fact, there were many misses within the global footprint. But he was a charismatic leader for that stage in Aurora’s history. Now, the company is wisely moving from a visionary to a person more focused on execution.
Aurora’s new CEO Miguel Martin has a long career primarily working in the tobacco industry. There are some obvious ways in which those skills can be helpful in the cannabis market. Aurora is already producing more than $50 million per quarter in revenue. It no longer needs an empire-builder CEO, but rather someone who can work a budget and bring much-needed discipline and efficiency to the business.
Martin will also have enough financial resources to have a good shot at turning things around. As of last quarter, Aurora had 160 million CAD of cash on hand, and had more than 200 million CAD left in its stock sale program as well. This, combined with cost-cutting efforts, should give Aurora long-term staying power.
ACB Stock Verdict
We’re a long way from the marijuana market being settled. However, we’re also out of the first innings. A ton of early competitors have already gone bankrupt or had to sell out. The market is starting to consolidate.
At the same time, valuations continue to plunge. This sets up a favorable dynamic where Aurora has fewer competitors to deal with, and the share price also is less and less demanding.
Aurora is a risky stock, don’t get confused there. However, the risk declines as the share price heads south. Meanwhile, the competitive landscape is improving. Aurora is still a viable company in what should eventually be a highly profitable industry. There’s no guarantees that ACB stock is ever going to be a big winner, but the odds for new money have improved versus where they were a year ago.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.