Cannabis stocks have been among the biggest winners since the presidential election. And this was very good news for Aurora Cannabis (NYSE:ACB). At one time it was one of the darlings of the nascent cannabis sector, but ACB stock has fallen on hard times.
But some investors are beginning to believe the company has turned a corner. New management is in place that is sharpening the company’s focus. And then there is the tantalizing hope that the United States will legalize marijuana at the federal level.
I prefer taking a longer view. At some point, likely in the next decade, the United States market will become fully open for cannabis companies. In the meantime, the cannabis sector is likely to go through normal consolidation. Call it survival of the fittest.
But if only the strongest will survive, I’m not sure I’m ready to put Aurora Cannabis on that list.
A Question of When
On Nov. 3, 2020, four additional states passed ballot initiatives to legalize recreational marijuana. That now means 15 of these United States legalized both recreational and medical marijuana.
The number is even greater for states that legalized medical marijuana. For those scoring at home, that number is now at 33, or 36 if you count Puerto Rico, Guam and the U.S. Virgin Islands.
And with an occupant in the White House who has already said he is agreeable to, at the very least, decriminalizing marijuana, the table looks to be set. However, with a pandemic still raging I’m not sure that legalization will make it high on the new administration’s priority list.
But let’s say it does. Aurora Cannabis has a minimal presence in the United States at this time. And the simple fact is that it doesn’t have the cash to get there anytime soon.
Aurora Cannabis Has a Narrow Path
When I first started writing about Aurora Cannabis last year, I saw a path for the company through medical marijuana. Unfortunately the company took an untimely and unwise detour. Aurora tried to become one of Canada’s leading growers at a time when it was becoming clear that supply far exceeded demand.
That left Aurora in a position of devaluing the assets they have. And with only about $50 million of revenue in the last quarter, it’s still clear that they have work to do in capturing market share in their home country.
I still believe that the path to legalizing cannabis in the United States goes through the medical marijuana route. And this is where Aurora Cannabis has its most compelling story. But this is a narrow path that includes the twin sirens of competition and regulation.
And then there’s the problem of cash. As in, Aurora continues to burn through cash. That isn’t entirely unexpected. However, unlike Canopy Growth (NASDAQ:CGC) that has Constellation Brands (NYSE:STZ ) infusing cash into its operations, Aurora is largely on its own.
This crystallizes the problem as I see it for Aurora and ACB stock. Without revenue, it has no choice but to issue new shares in order to raise cash. It’s fair to say that with enough discipline the cycle could stop. The problem for Aurora is that it rarely does.
ACB Stock Is Not a Buy Yet
The cannabis sector has had more than its share of unfortunate events. Even if you’re the biggest cannabis bull, you will have to have an exceptional amount of patience as you wait for this market to mature.
And I understand that our national lack of patience may make a temporary spike in ACB stock look attractive. I’d advise against that line of thinking.
Aurora Cannabis pushed aggressive growth when it should have stayed put. Now it can’t afford to stay put, but the only way for it to grow is to continue to dilute shareholder value. Aurora made its balance sheet look better because it cut spending. As I’ve remarked before, playing defense only gets you so far, particularly when you’re in a growth sector.
You don’t have to be weak on cannabis to not like where this story is headed. ACB stock looks weak at a time when it needs to be strong. There are simply other cannabis stocks that look like a better buy.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
