Aurora shares have nearly tripled since Nov. 1 based on optimism about the path to U.S. federal legalization. But even if the U.S. eventually legalizes cannabis, Aurora will still be at a competitive disadvantage to better-positioned companies. Aurora still has major financial problems. The company recently completed its latest in a string of dilutive capital raised to fund its growth efforts.
With the stock up big since Election Day, ACB stock investors should at least be taking some of those profits off the table at this point.
Reasons to Like ACB Stock
Despite its struggles, there are still plenty of reasons to be optimistic about Aurora’s outlook in the long term.
Morningstar analyst Kristoffer Inton is projecting Canadian medical marijuana sales volume will grow by about 5% annually from 2020 to 2029. He is also optimistic that Aurora will eventually achieve profitability. Eventually.
“By 2029, we expect [operating] margin to reach about 19%, due to the full ramp-up of production and fixed-cost leverage against overhead expenses. We forecast Aurora to reach positive free cash flow generation in 2025 as profits rise and the company manages capital spending,” Inton says.
Morningstar is projecting revenue growth will accelerate from 13.4% in 2020 to 33.6% in 2021 and 50.6% in 2022. That growth would certainly be impressive. It is likely one of the driver’s behind Inton’s “buy” rating and $26 fair value estimate for ACB stock.
Funding Concerns Remain
Long-term ACB stock investors know the bear case has always been all about access to capital. In November, Aurora once again raised $172.5 million in capital via an at-the-market equity offering. It’s the latest in a parade of dilutive equity offerings for the company.
ACB stock investors are no strangers to seeing their investments chipped away with one offering after another. Incredibly, the stock’s outstanding share count has increased by more than 11,800% in the past six-plus years.
Meanwhile, Aurora has pushed to control costs by cutting its production in half. It sacrificed potential international growth opportunities. And it failed to find a major financial backer, unlike many of its Canadian cannabis peers.
Cantor Fitzgerald analyst Pablo Zuanic says Aurora is certainly better-positioned to start 2021 than it was to start 2020. He estimates Aurora ended the fourth quarter with only about $41 million in net debt.
“We certainly do not blame management for making use of the steep post-election bump experienced by the stock,” Zuanic says of the latest offering.
He also said ACB trades at a valuation discount to its Canadian legal producer peers.
“Taking the equity offering price (10% discount), ACB trades at a discount to all major LPs, which we think should protect the downside, in relative terms,” Zuanic says.
Unfortunately, given the uncertainty in Aurora’s outlook, he doesn’t see much upside for the stock either. Cantor Fitzgerald has a “neutral” rating and C$12 ($9.45) price target for ACB stock.
How to Play It
I’ve repeatedly pounded my fist about the best approach for investors to take with cannabis stocks. I believe there will be some huge winners in the long term. But there is simply too much risk, too much uncertainty and too much competition at this point to be putting all your eggs in one basket.
My favorite cannabis stock is Canopy Growth (NASDAQ:CGC). It has the largest Canadian market share. It has a strong financial backer in minority investor Constellation Brands (NYSE:STZ). And it is well-positioned in the U.S. market via multiple buyout deals contingent upon U.S. federal legalization.
But for now, I continue to recommend cannabis investors hold a portfolio of at least four or five of the best Canadian LPs and U.S. multi-state operators. The path forward will likely continue to be difficult from a legal and financial standpoint in the near term. Cannabis investors should consider things like cash flow, debt levels and growth rates, none of which is Aurora’s strong suit.
Aurora may still have some tremendous long-term upside ahead. But now is a great chance to take at least some of your ACB stock profits and diversify into other cannabis stocks or other opportunities.
On the date of publication, Wayne Duggan held a long position in CGC.
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.