Because of the near-universal reach of the novel coronavirus, very few investment sectors have gone unscathed. Among the hardest hit is the cannabis sector, which in many ways is a double whammy. Many have given up on the green market because of its seemingly unsustainable trajectory, particularly for previously growth-intensive names like Aurora Cannabis (NYSE:ACB). Therefore, should investor sentiment return, they might forget about Aurora stock and its ilk.
Throughout most of this year, ACB appeared destined for the trash heap. If you look at the technical chart through May 13, you’ll notice that Aurora stock printed an uninterrupted bearish trend channel. However, from May 14 onward, shares have more than doubled. What gives?
After several disappointments, Aurora finally managed to deliver an earnings report that caused many on Wall Street to smile. In its fiscal third-quarter report, the cannabis firm saw sequential revenue jump 35%, far exceeding analysts’ expectations. Breaking it down, international medical and Canadian recreational sales beat estimates, while gross margins increased to 42.2%.
After so much bad news, Aurora stock skyrocketed. According to Alan Brochstein, founder of 420 Investor and New Cannabis Ventures, “This was clearly a case of the patient being presumed dead, when indeed it’s not.”
Still, it’s fair to point out that not everyone was convinced. First, Aurora stock may have mostly jumped on what I would call the “George W. Bush approach” of low expectations. Second, not every metric was positive. For instance, Aurora’s EBITDA loss was approximately $10 million, which was worse than expected.
Frankly, following so many ugly performances, management has much more to prove. Yet if it can hang around, ACB does offer a compelling long-term narrative.
A Possible Relevant Storyline for Aurora Stock
When I first discussed marijuana stocks, I spoke often about their transformative nature. Essentially, this is all about a black market turning into a recognized (i.e. taxable) market. In my opinion, it’s a win-win across the board: cannabis users get their fix and the government gets their taxes.
Combined with decriminalization efforts, overcrowded penal institutions can be freed up for serious crimes. And no, I don’t think someone lighting up a joint – so long as they’re not bothering anyone else – should be considered a crime. Especially in this environment, we have more important things to worry about.
Unfortunately, that narrative hasn’t quite panned out the way I had hoped. I still believe in the sector’s transformative nature. However, companies grew too fast without much consideration for sustainability.
It’s clear that the reshuffling that we’ve seen in this industry is a reflection of reset priorities. But will that be enough to save Aurora stock? I hope so, but I can’t say for sure.
But assuming that ACB can survive the coming game of musical chairs, the coronavirus has inadvertently offered up a catalyst: a viable platform for addressing mental health issues.
With billions of people across the globe impacted by government lockdowns, mental health has suddenly become a hot topic. By nature, we humans are social beings. Being deprived of that suddenly threw us all for a curve.
Moreover, many regions of the U.S. are still under stay-at-home orders. Coincidentally, just before the outbreak, Aurora has demonstrated significant interest in expanding into the U.S. cannabidiol (CBD) market.
This is particularly enticing for Aurora stock in that scientific evidence suggests a correlation between CBD and alleviating mental health pressures, including lowering feelings of isolation. If that doesn’t get you interested, nothing will.
That’s Awesome, but Can ACB Survive?
Another important factor to consider is that CBD is legal in the U.S. due to the 2018 Agriculture Improvement Act. Primarily, CBD addresses conservative critics’ concerns because at a mandated tetrahydrocannabinol (THC) content limitation of 0.3%, CBD products will not get you high.
So, if the U.S. – which has a funny history with cannabis – can get over itself, it’s possible that other countries will too. Given ACB’s relatively strong international presence, this is a long-term positive for Aurora stock.
But can the company survive long enough to enjoy these potential riches? Again, this is the real question. While tailwinds exist for Aurora, they also serve its better supported competitors like Canopy Growth (NYSE:CGC) or Cronos Group (NASDAQ:CRON). No matter what, ACB is a speculative bet.
But if you’re willing to make it, Aurora Cannabis may surprise you. Just be sure you know what you’re getting yourself into.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he owns ACB stock.
