- Down by around two-thirds in the past year, Aurora Cannabis (ACB) may look cheap at today’s prices.
- Yet even when factoring for projected cost savings next year, shares remain pricey.
- There may be reason to buy it as a bet on U.S. pot reform, but outside of that little reason to buy.
Like other Canada-based pot stocks, Aurora Cannabis (NASDAQ:ACB) has steadily dropped in price in the past year. Over the last twelve months, ACB stock has declined by around two-thirds (66.3%). Year-to-date (YTD) alone, it’s dropped by around 47%. With this big plunge, you may think Aurora is at the point where it’s a value play.
But using traditional valuation metrics, it’s tough to say it is a value stock. It trades at a discount to its book value, yet much of its overall book value is made up of accounting goodwill. On a tangible book value basis, there’s a slight premium rather than a big discount.
How about being cheap relative to earnings? It’s hard to make that argument, either. Although there may be another reason for buying (unrelated to fundamentals), think again if you’re buying this in the hopes increased profitability sends it soaring.
ACB Stock and Upcoming Improvements to Adjusted EBITDA
Above, we’ve established why Aurora Cannabis isn’t a bargain, in terms of it selling at a discount to its net asset value. Now, let’s see why it’s pricey, relative to earnings. Recent remarks from CEO Miguel Martin have hinted that a big jump in profitability is just around the corner.
At the recent Benzinga Cannabis Capital Conference, Martin said he was confident that Aurora would become profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis by the end of this fiscal year (June 2022). Granted, positive EBITDA isn’t the same as net income.
Positive EBITDA, however, would be a big step in the right direction. Not only that, having positive EBITDA would make it easier to calculate a fair valuation for ACB stock. So, to what degree could Aurora’s EBITDA numbers improve over the next year?
It’s all laid out in a February 2022 investor presentation. Through cost cutting, management believes it can increase EBITDA by between 15 million CAD and 20 million CAD (around $11.8 million-$15.7 million), compared to the 9 million CAD ($7.1 million) EBITDA loss it reported for the December 2021 quarter. This implies a swing to $8.6 million in positive EBITDA per quarter, or $34.4 million on an annualized basis.
Not Enough to Move the Needle
Cost savings may result in big improvements to its profitability. Will it have a big impact on the ACB stock price? Probably not. Even when taking this swing from negative to positive adjusted EBITDA, shares are still sporting a premium valuation.
At least, based on the enterprise value/EBITDA (EV/EBITDA) metric. Right now, Aurora has a market capitalization of $655.5 million. Add $327.75 million in debt, and subtract $264.2 million in cash, and you get an enterprise value of around $719 million.
Assuming the cost savings arrive, and adjusted EBITDA hits $34.4 million per year, Aurora Cannabis still trades at a high multiple (20.9x). Sure, if growth was high enough, such a valuation could be justified. However, that’s not the case at present. Per analyst estimates, revenue growth is expected to decline this fiscal year (-4%). Next fiscal year, revenue is only expected to rise by 14.5%.
Admittedly, there may be more cost saving opportunities in the future. For instance, it could achieve more cost synergies, once its pending deal to buy TerraFarma closes. With its large cash position, it could also make other deals that are accretive to earnings.
Bottom Line: Minimal Upside, Minimal Downside, Not Worth Buying
Even if there are more profitability improvements ahead, this may not be enough to grow Aurora’s valuation, either. Rising interest rates continue to put pressure on valuations. The stock is far more likely to see multiple compression than multiple expansion.
Then again, considering it trades just over tangible book, downside risk may be minimal. Assuming cash burn is an issue of the past? Chances are it won’t fall far below the net value of its tangible assets ($2.81 per share). Despite its rich multiple, it may not be at risk of dropping in price by another two-thirds.
Still, minimal downside doesn’t mean much, in light of limited upside potential. You could make the argument that these characteristics make it worth buying, if only as a long-shot bet on U.S. pot reform. Like with other pot stocks, it moves wildly whenever legalization comes up in Washington.
Outside of this, however, there’s little reason to buy ACB stock today.
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On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.