Since March of last year, Aurora Cannabis (NYSE:ACB) has shown signs of life basically once. After May’s fiscal third quarter report, Aurora stock soared, gaining 69% and 53% in back-to-back sessions. But that’s really been it.
To be sure, Aurora stock has seen a few one-day spikes here and there. It had a nice three-day run back in November — but even that was a “dead cat bounce” after disappointing fiscal Q1 earnings knocked the stock down by over one-third. Almost without exception, ACB has headed in the wrong direction for some 18 months.
Obviously, it hasn’t been alone. Cannabis stocks have been hammered over that stretch. But few have done worse than Aurora stock, which has lost more than 90% of its value. The company had to execute a reverse split in May to keep its price high enough to remain exchange-listed.
Even the post-earnings optimism from May has faded. About three-quarters of a three-session, 195% gain has reversed. I can’t say I’m surprised.
Indeed, I questioned that rally, as I argued that Q3 wasn’t nearly as strong as investors seemed to believe. Over the past few months, the market has come around.
Earnings loom again this month (though Aurora hasn’t disclosed an exact release date). We may see another burst, particularly with short interest still reasonably heavy. But the long-term problem holds: there are many better plays on cannabis than Aurora stock.
Industry Challenges
Up front, I’m still a big believer in cannabis. That’s why I offer my Cannabis Cash Weekly service.
But the industry has its challenges at the moment. The novel coronavirus pandemic certainly hasn’t helped. It seems increasingly clear that Canadian operators built out too much capacity. That used valuable cash and is pressuring both pricing and profit margins.
Meanwhile, there hasn’t been as much movement on legalization as bulls would have hoped. The patchwork of regulation in the U.S. leaves exchange-listed companies out of the market. Worldwide, the news isn’t much better, though many companies (including Aurora) could benefit from potential legalization in Israel.
The long-term opportunity, however, remains. Legalized cannabis is dealing with growing pains. Mistakes were made. But legalization still seems likely to spread, with the U.S. prize potentially accelerated depending on the results of (and the reaction to) November’s elections.
In the near-term, investors should be cautious. They should be patient. But in the long-term, cannabis still is going to be a big business with multiple winners.
Boxed In
The problem with Aurora stock, however, is that past decisions have left the company unable to aggressively position itself for that long-term growth.
Indeed, one quote from chief financial officer Glen Ibbott on Aurora’s earnings call in May — held after the company crushed analyst expectations with Q3 results — shows the core problem. I’ve highlighted this quote before, but it’s worth returning to:
We are, however, reaffirming our commitment to manage the business to positive EBITDA in Q1 2021 using whatever additional cost levers we need to …
Aurora promised investors it would get to positive EBITDA (earnings before interest, taxes, depreciation, and amortization) in the first quarter of fiscal 2021, which ends in September. And Ibbott reiterated that promise — using “whatever additional cost levers we need to.”
In other words, Aurora is going to slash its spending to post EBITDA profitability. It doesn’t matter if there is an opportunity to take market share in the “Cannabis 2.0” products that are going to drive Canadian growth. It doesn’t matter if upfront investments are required in Israel or other burgeoning markets.
Why? It’s not because Ibbott and other Aurora executives don’t know what they’re doing. It’s because they have no choice. Aurora has a significant debt problem. It’s been funding itself through selling Aurora stock “at the market” — which dilutes shareholders.
Those sales also create a vicious cycle. Debt concerns make investors sell the stock. Aurora needs to sell more of its stock to raise the same amount of cash. The stock price falls, more investors sell, Aurora has to sell more, etc. etc.
That’s why costs are getting slashed. But that’s the wrong strategy. Near-term losses are wise if they can drive long-term growth. Aurora simply doesn’t have that option.
Better Choices Than Aurora Stock
Others do. Many cannabis companies still have substantial amounts of cash. That will allow them to focus on capturing customers and entering the new markets — including, eventually, the U.S.
Aurora did strike a deal to enter the American market. It acquired Reliva in May. But Reliva is a CBD (cannabidiol) play only. And, once again, Aurora diluted shareholders, paying $40 million in stock with the potential for as much as $45 million in earnouts if the business outperforms.
But, how, exactly, is Aurora supposed to grow Reliva, or any of its businesses, while slashing costs? That’s the core problem here. AIt’s a bigger problem for the cannabis bulls who should be most enticed to take a flyer on a stock like ACB.
Again, other companies are serving the same market — but from a much stronger position. They don’t have debt problems. Their stock prices aren’t down 67% this year. They don’t have very real concerns about solvency that would make potential acquisition targets nervous (particularly if they, like Reliva, are getting paid in stock).
Simply put, cannabis bulls can do better. Flashy Q3 earnings briefly obscured that problem. The fiscal fourth quarter report this month may do the same. But they only hide the problem — they don’t fix it. Aurora is boxed in, and that’s a terrible position to be in any industry, let alone a long-term growth business like cannabis.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matt McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
