Aurora Cannabis (NYSE:ACB) reported mildly better financial results on Feb.11 for its fiscal Q2 ending Dec. 31, 2020. The problem is that ACB stock is never going to move significantly higher until the cannabis company stops burning through cash.
For example, ACB stock has fallen 36% from a recent peak of $18.98 on Feb. 10 right before the results were released. As of Feb. 19, it was down to $12.31. In other words, the market was not impressed with the numbers.
Weak Cash Flow Performance
Aurora Cannabis reported that its Q2 results showed cash burn — it calls it cash use — of 70.5 million CAD. This includes negative cash flow from operations, capex spending, working capital losses or usage, and debt and interest payments.
This is both good news and bad news. The good news is that cash burn fell from 273 million CAD last year and even 142.8 million CAD last quarter. In other words, it lowered its cash burn by over 50% in the last 90 days.
But the problem is that the company is still losing money. It simply cannot keep on doing this. Granted, Aurora Cannabis still has a large amount of cash in its coffers. It amounted to 434.4 million CAD at the end of the quarter. But this includes 50 million in restricted cash, so the amount available is only 384 million for ongoing non-debt expenses.
That means that if the 71 million cash burn continues for four to five quarters, the company will run out of cash or have to do another cash raise. For example, during the last quarter, Aurora raised 365 million CAD in equity financing.
To put it bluntly, the market is tired of the dilution coming from these equity financings. ACB stock won’t abide this anymore. If Aurora cannot show that it is producing cash rather than burning through it, ACB stock will continue to fall.
What Analysts Say About Aurora Cannabis
ACB stock was downgraded by MKM Partners after the results were released. The analyst, Bill Kirk, said that the stock price target was no better than $7.
He pointed out the company is “not on a cost-cutting or growth path that gets to near-term positive EBITDA.”
EBITDA is earnings before interest, taxes, depreciation and amortization. It is a measure of cash flow that does not even include capex spending, debt principal payments and changes in working capital.
In other words, even on the weakest measure, the analyst said the company would not measure up to produce positive cash flow.
Moreover, TipRanks reports that the average of 11 analysts who have provided 12-month price targets on ACB stock in the last three months is $9.46. That represents a loss of about 22% from today’s price.
Similarly, Marketbeat says that its survey of analysts is an average of $11.81, or 1.7% below today’s price.
As the Motley Fool says, profitability in the industry is scarce. Despite the decriminalization/legalization trend, there are “negative forces.” These include “oversupply, black market competition, and the challenges of selling products that remain illegal at the federal level in the U.S.”
What to Do With ACB Stock
Investors are not willing to take the long view on unprofitable and cash-burning cannabis stocks any longer. They figure the management of these companies have to get their acts together.
They will have to stop diluting shareholders with numerous equity financings before share prices like ACB stock will rise significantly from here.
Most investors will look for an entry point at the point of maximum pessimism. This will likely occur within the next several quarterly earnings releases, if not before. In other words, the point of inflection here will be when Aurora Cannabis starts projecting profitability or positive cash burn, even if it hasn’t happened yet.
Until then, I suspect potential investors will tread water and look for an entry point in ACB stock that makes sense for them.
On the date of publication, Mark R. Hake does not hold a long or short position in any stock or security mentioned in this article.