Back in May, I wrote about how much the fundamental picture of Aurora Cannabis (NYSE:ACB) stock had improved. However, I said investors should patiently wait for a better entry point. At the time, the stock had tripled in a matter of days.
Roughly three and a half months later, ACB stock is down 50% from those levels. At this point, I think it’s time for long-term investors to start dipping their toes into the shares. The company has demonstrated that it is on the right track. And the stock’s risk-reward balance is definitely positive now that it’s trading under $8 again.
An Update on ACB Stock
Earlier this month, Aurora announced that its chief commercial officer, Miguel Martin, was taking over as the company’s new CEO.
In addition to the management reshuffle, Aurora also updated its guidance. The company said it now expects to reach positive earnings before interest, taxes, depreciation and amortization in its fiscal second quarter. That profitability target was previously set for Q1. Aurora is due to report its Q4 earnings on Sept. 22.
In addition, Aurora announced that it would take a non-cash writedown of goodwill and intangible assets of between C$1.6 billion ($1.21 billion) and C$1.8 billion ($1.37 billion).
Looking ahead, Aurora’s Q4 revenue guidance was roughly in-line with analysts’ average estimates.
The owners of ACB stock are hoping the writedowns and new leadership will provide the company with a fresh start. Cantor Fitzgerald analyst Pablo Zuanic says Aurora is well-positioned for the long-term.
“Because of the company’s domestic scale in [recreational and medicinal marijuana], and [its] relevant, though budding, overseas presence, we continue to think ACB shareholders will benefit from a future cycle of mergers among Canadian [legal producers],” Zuanic stated.
In the meantime, the company’s biggest challenge will be reversing its recent market-share losses and beefing up its product portfolio in a highly competitive market.
“A strengthened line of vapes and pre-rolls, and increased focus on premium/better flower should address these issues, according to newly appointed CEO Miguel Martin, and should also contain gross margin pressures,” according to Zuanic.
Cantor Fitzgerald has an “overweight” rating and a C$17.50 ($13.28) price target on ACB stock.
The plunge of ACB stock in the wake of news of the large writedown was understandable. Further, management said that the company had just $160 million in cash as of the end of June, and last quarter, Aurora burned $154 million of cash.
There’s no question that Aurora’s balance sheet remains a concern for anybody buying the stock. The company will need to continue to cut its cash burn and reduce its expenses. It will also need to actually become profitable at some point.
I’ve previously called ACB stock a “lottery ticket” that could pay off big for investors.
Like me, Morningstar analyst Kristoffer Inton is bullish on Aurora. But he says the stock is not for the faint of heart.
“While shares look undervalued, we reiterate our extreme uncertainty rating,” Inton stated.
He says one of the biggest risks for Aurora’s investors in the near-term is that its cash burn will necessitate more dilutive equity offerings. Dilution has been a major thorn in the side of Aurora’s investors for years.
How To Play It
The updated Q4 guidance has set expectations extremely low. If Aurora can continue to cut its costs, grow its revenue and reduce its cash burn, the stock is a great long-term bet. But investors should know that those are big “ifs.”
“There is always uncertainty when investing in startups, but we consider Aurora among the riskier across the already risky cannabis industry,” Inton says.
Despite his caution, Morningstar has a “buy” rating and a $30 fair value estimate on ACB stock.
I think Inton’s take on Aurora is accurate. He repeatedly warns of risk, dilution and uncertainty. Yet his fair value estimate is about 300% above the stock’s current levels.
If you’re willing to stomach the volatility and risk, I say Aurora can climb a great deal. But bet on other marijuana stocks, too.
I recommend that cannabis investors diversify into a basket of several high-quality stocks. In addition to Aurora, consider buying Canadian names Canopy Growth (NYSE:CGC) and Aphria (NASDAQ:APHA). Add a couple of US multi-state operators as well, such as Cresco Labs (OTC:CRLBF), Curaleaf (OTC:CURLF) and Green Thumb Industries (OTC:GTBIF).
On the date of publication, Wayne Duggan held a long position in ACB.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book Beating Wall Street With Common Sense, which focuses on investing psychology and practical strategies to outperform the stock market.