Aurora Cannabis (NASDAQ:ACB) has been an awful investment this year. ACB stock dipped 39.6% year-to-date to $3.43 per share. The bearish pattern has however slowed in the past month, after the announcement of TerraFarma’s acquisition, a high margin recreational cannabis firm.
Interest for cannabis stocks took a hit this year, as investors refuged into valuable assets that tend to minimize the effect of rising inflation and interest rates. While TerraFarma’s integration will improve Aurora’s profitability in the medium term, the company has a poor track record. The pot company missed earnings per share (EPS) expectations in three of the last four quarters. After the transaction, ACB expects to reach Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability in the first half of fiscal 2023. While this bodes well for its financial outlook, the recreational cannabis company is not expected to turn a profit in the next two years.
In addition, ACB’s top-line growth rate steadied in the past few quarters. After decreasing 12.2% to 245 million CAD in 2021, net sales are projected to decline 3.7% this year to 236 million CAD. On the other hand, Aurora’s net loss is estimated to contract this year, posting an annual net loss of 165 million CAD versus a deficit of 695 million CAD in 2021.
Meanwhile, free cash flow is forecasted to enhance this year, posting a deficit of 90.9 million CAD compared to a negative figure of 264 million CAD in 2021. Despite this improving financials, Aurora had a fragile cash position of 21.9 million CAD at the end of 2021, indicating that it will have to raise additional capital to honor its engagements. Moreover and even if ACB stock lost nearly 40% of its market capitalization over the year, its valuation multiples remain overstretched, exchanging at 4.45x 2022e EV/ Revenue.
Cannabis stocks underperformed equity markets, providing attractive entry points for long-term investors. Besides, most cannabis stocks are nearing profitability, a strong catalyst for this emerging industry. The recent acquisition of TerraFarma is constructive for ACB’s equity story. Nevertheless, Aurora’s bearish momentum is not ready for a reversal, given the challenging market environment, defined by high inflation and rising interest rates.
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