Aurora Stock Needed to Reverse Split, But It’s Still Not a Buy

Aurora Cannabis (NYSE:ACB) shares tumbled 13.3% on Monday, April 13. That’s after the company announced a 1-for-12 reverse split. With Aurora stock trading below $1, the company had little choice but to engineer the move.

aurora stock
Source: Shutterstock

To be fair, sometimes reverse splits do generate positive reactions once complete. At one point, Citigroup (NYSE:C) had to reverse split its stock to get it out of the doldrums. While the company has done better lately though, it still lags many of its peers in terms of performance and valuation.

However, plenty of other stocks have engineered the move with little to no success. Will Aurora stock be one of those, or will they pull a Citigroup and gain traction? There’s no way to know with a large degree of certainty, but it’s not the cannabis name we want to bet on.

Aurora Stock Splits

Companies have to maintain certain requirements to remain on the stock exchanges where they are listed. The New York Stock Exchange, which is where Aurora stock is listed, does not want a bunch of penny stocks on its board. When stocks fall below $1, they face the potential to be delisted.

As a result, Aurora management plans to reverse split the stock, offering 1 share for every 12 shares of stock investors own. Obviously that does not equate to a 12-fold return when the share price balloons higher. It’s a simple sleight-of-hand, altering the share count to elevate the stock price. It’s the same when companies want a lower stock price — like Apple (NASDAQ:AAPL) or Starbucks (NASDAQ:SBUX) — and split their stocks.

It’s not unethical, but it does nothing to change the realities at Aurora.

Will Aurora Stay Afloat?

In addition to the reverse stock split, the company said it plans to raise more capital. That’s even with 205 million CAD sitting on its balance sheet as of the most recent quarter. Further, management says that the company’s facilities continue to operate and that it remains on track with its business transformation announcement.

A lot has happened since we last heard from management on Feb. 13. That’s when Aurora announced its fiscal second-quarter results, missing on revenue estimates and reporting an adjusted EBITDA loss of 80.2 million CAD.

That release came just days after the company announced a 17% to 18% reduction in its workforce, while its CEO stepped down as well. Management also slashed its revenue outlook and took a number of impairment charges.

It’s true that Aurora stock needed change at the top, and its Canadian operations are running more smoothly than its international expansion efforts. While the industry as a whole has an optimistic future, there are simply too many red flags here.

While the cannabis group has struggled over the past year or so, Aurora has looked lost at sea. There’s a reason the stock is down 91% over the past 12 months and 67% year to date. The outbreak of the novel coronavirus certainly doesn’t help the stock price, but this company’s issues began long before the global pandemic.

Simply put, its financials are not in strong enough standing to convince us to bet on this horse. Sales are struggling, losses are mounting, and the balance sheet does not suggest robust staying power. For those reasons, we are avoiding Aurora stock, even below $1.

Aurora stock enjoys cannabis consumption
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Source: Chart courtesy of Statista, Source from SAMHSA; RTI International

Bottom Line on ACB Stock

The cannabis space is enjoying deregulation around the world. Companies, startups and medical teams are studying the various effects and increasing uses for cannabis and cannabinoid-related products. The industry is moving forward at a pace it has never seen.

But that doesn’t mean every company will succeed. Perhaps Aurora stock will do just that — defying the odds, raising capital and reverse-splitting its way to success. Right now though, ACB presents too much risk.

While other stocks in the group have been beaten down too, we feel more comfortable in a stock like Canopy Growth (NYSE:CGC). It has a stronger balance sheet, a strong partner in Constellation Brands (NYSE:STZ), and stands on stronger ground at the moment.

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