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Bears Will Win Big as It Bets Heavily Against Aurora Cannabis Stock

Investors that impulse bought cannabis stocks following the Democrats winning the U.S. Presidential elections will regret it. The mid-November spike that sent Aurora Cannabis (NYSE:ACB) did not last long. The company’s quarterly earnings report at first sent Aurora Cannabis stock above $12.00. But like clockwork, management took advantage of gullible investors by selling $150 million worth of shares.

With America Turning Green Things Only Can Get Better for Aurora Stock
Source: Shutterstock

Investors who still own shares should think of selling it to get what they can.

Q1/2021 Results Lifted Aurora Cannabis

On Nov. 9, the company posted revenue falling by 1% sequentially to 67.8 million CAD ($51.8 million) . This is almost flat from the prior quarter’s 67.5 million CAD of cannabis net revenue. It posted an adjusted EBITDA loss of 57.9 million CAD. The company highlighted the adjusted gross margin, before fair value adjustments, at 48%. CEO Miguel Martin once again suggested that the company is on the way to ultimately achieve positive cash flow and sustainable profitability.

As shown below, Aurora failed to beat analyst expectations most of the time. It only exceeded estimates in two of the six past quarters:

Surprise Type Announce Date Period End Date Actual Est. Surprise (%)
Negative 11/9/2020 9/30/2020 ($0.64) ($0.24) -166.70%
Positive 9/22/2020 6/30/2020 ($0.13) ($0.30) 56.70%
Negative 5/14/2020 3/31/2020 ($0.74) ($0.53) -39.60%
Negative 2/13/2020 12/31/2019 ($0.18) ($0.06) -200.00%
Positive 11/14/2019 9/30/2019 $0.01 ($0.03)
Negative 5/14/2019 ($0.08) ($0.03) -166.70%

Chart courtesy of Stock Rover

When it missed consensus estimates, the company tended to underwhelm by a mile.

To translate, investors will have to wait longer. The Q1 results are transitional because they exclude the Nordic 1 ramp-up costs. This allowed it to post a gross margin of 52% after adjustments. Chances are high that the company will keep burning cash. To stay afloat, it will need to either sell shares or take on more debt.

As of Nov. 6, Aurora had cash of approximately 250 million CAD. For the quarter ended June 2020, it had long-term debt of $217.2 million.

Share Sale

On Nov. 11, Aurora priced 20 million shares at $7.50, raising $150 million. The offering will not stop Aurora Cannabis stock from selling shares again in the near-term. if its EBITDA loss continues at 57.9 million CAD quarterly, then the company will burn through those funds raised in less than three quarters. After quickly selling shares not long after the stock’s rally, investors cannot trust the company. Markets acted as though Aurora did not reverse split its shares 12:1 just to keep its listing on the Nasdaq.

Growth Catalyst in the U.S.

CEO Martin said that potential federal action in the States could help Aurora’s business. On the conference call, he said, “We had four really important states pass comprehensive cannabis legislation, and so that starts to move the ball forward in terms of when do you get to this tipping point.”

So, the CEO is speculating that the U.S. and other countries are opening up to cannabinoids containing Tetrahydrocannabinol (THC). Aurora has lots of experience working with Canadian LPs, as the federal government oversaw the manufacturing, production, packaging, and sales and marketing of cannabis. Conversely, the company faced rigorous headwinds operating in Germany, Poland, and Israel. With that experience, Aurora might have expertise in successfully expanding in the U.S. market.

Fair Value and Your Takeaway

Investors may assume a perpetuity growth rate of no more than 4%. In a 5-year discounted cash flow growth exit model, Aurora Cannabis stock is worth ~$3.50. Readers may use the assumptions below. The forecast assumes that Aurora will continue to struggle in growing sales in the future.

Metrics Range Conclusion
Discount Rate 10.5% – 9.0% 10.00%
Perpetuity Growth Rate 3.5% – 4.5% 4.00%
Fair Value $2.65 – $5.41 $3.46

Model courtesy of finbox

Readers may click on the finbox link to change the assumptions. For example, the discount rate will fall and the growth rate will rise in a more optimistic forecast. This view would lift the fair value estimate.

With that much downside risk, investors should let the market selling end before speculating on this stock. Bears have a 19.4% short position against the stock. They will stand to gain more as shares drift lower in the quarters ahead.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Article printed from InvestorPlace Media,

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