Few commentators are willing to defend Aurora Cannabis (NYSE:ACB) now. Over the past year, Aurora stock has steadily declined from $9 to under $1. And catching a proverbial falling knife is a dangerous game to play.
There’s a thesis, though, that the market has excessively punished Aurora stockholders. With a trailing 12-month price-to-earnings ratio of 4.06, this stock is cheap on a relative basis. Or are the shares just dead money? A broader look at the cannabis market could yield some clues.
A Recession Boost for Cannabis
While financial experts are busy talking about how the novel coronavirus has impacted the cruise-ship, airline and ride-share markets, investors shouldn’t ignore how it has affected the cannabis industry. Common sense might tell us that the net impact would be negative.
However, common sense can lead us astray sometimes. Sure, the prevalent stay-at-home mandates have caused some dispensaries to shut down. But in anticipation of this, consumers have flocked to the remaining open cannabis stores to stock up on weed.
Canada is often considered the pot capital of the world, and in Nova Scotia, cannabis sales increased by 76% in just one week. A number of Canadian provinces, including Quebec and Ontario, have declared cannabis stores “essential.” That’s pretty mind-blowing considering marijuana was illegal in the not-too-distant past.
As for Aurora, the company has been perfectly positioned for a situation like this. In fact, Aurora had 216 million CAD worth of cannabis inventory on their books prior to the sudden demand boost. This could be enough pot to meet a year’s worth of demand.
Cannabis at Your Doorstep
We’ve only discussed in-store pot sales so far, but that’s only a piece of the overall picture. As you probably are well aware, doorstep delivery has become a way of life as more cities institute stay-at-home mandates.
This means that businesses have had to shift their product-delivery strategies, while some local governments have relaxed their cannabis-related rules. For instance, Illinois has permitted the curbside pickup of cannabis-product orders during the coronavirus crisis. Nevada, moreover, is having its licensees deliver cannabis.
States don’t want to lose the tax revenues they receive from cannabis sales. Therefore, rather than lose this “economic stimulus,” it’s conceivable that more states will allow cannabis delivery. Many bored stay-at-homers would undoubtedly welcome such deliveries, both for their medicinal and their recreational benefits.
Not to suggest that the industry’s oversupply issues are completely solved, but the demand spike is well-timed. It’s also encouraging that Aurora is implementing a cost-reduction program. This proactive move could bring Aurora’s quarterly operating expenses under 45 million CAD.
The ability to produce high-quality cannabis in large quantities is key to Aurora’s success during this pivotal time. Aurora’s press release for 2020’s second fiscal quarter suggests that the company remains productive and ready to meet the demand: “Production volume in fiscal Q2 was 30,691 kilograms, in-line with previous expectations as Aurora realigned its cultivation strategy to produce a greater amount of higher value and higher potency strains.”
The Takeaway on Aurora Stock
The trading community really beat up on Aurora stock over the past year. It seems excessive and that could present a chance to buy shares at a steep discount. Stay-at-home orders might actually prove to be the catalyst that resurrects Aurora and the cannabis market as a whole.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
