The cannabis industry got a boost just prior to the beginning of 2018 when the market anticipated legislation to legalize recreational use in both California and Canada. This was the so-called ‘green rush’ and it was short-lived thanks to high taxes in the U.S., slow approval of retail outlets in Canada, and a highly competitive black market. After a few dead-cat-bounces, stock prices began to drop in earnest in 2019 and continue to do so today, as evidenced by one of the industry’s ETFs, ETFMG Alternative Harvest (NYSEARCA: MJ).
However, as one of the sector’s biggest players, is Aurora Cannabis (NYSE: ACB) a good investment?
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The bull case for Aurora Cannabis
Aurora has a huge global presence, with production, export agreements, and research in 25 countries, more than any of its competitors, which is perfect for exporting product when its Canadian market is at capacity. On October 17, 2019, Canada legalized ‘cannabis 2.0’ products, or derivatives, like tinctures, edibles, beverages, and vaping oils, and Aurora gained a 27% market share for its Drift brand of products. Earlier in May, the company acquired Reliva, a cannabidiol (CBD — a non-psychoactive cannabis extract unlike THC) manufacturer, with the second-largest market share and an extensive retail reach in the U.S., to gain a vital foothold in the thriving U.S. market; a good move as CBD sales are forecasted to reach $24 billion by 2025. In November, Aurora opened its flagship 11,000 square-foot store in the West Edmonton Mall and it averages 700 visitors per day.
To combat heavy cash burn and achieve positive EBITDA, the company laid off 25% of its sales, general, and administrative staff and will lay off 30% of its production staff by the end of this year, roughly 700 employees in total. Additionally, Aurora has suspended construction on two facilities in Denmark and Alberta, Canada to save over $140 million. Making these changes will bolster the company as the industry shakes off its growing pains and rebounds; a few reasons this is likely to happen include Health Canada’s cessation of a lottery system to issue vendor licenses, the U.S. legalization of marijuana (already considered an essential business during the outbreak) on a federal level to collect taxes and create more jobs as a response to the pandemic, and increased sales thanks to derivative products, which aren’t available on the black market.
The bear case for Aurora Cannabis
Earlier this year, Aurora Cannabis underwent a 12:1 reverse stock split to prevent it from being delisted by the New York Stock Exchange for trading under $1 for 30 consecutive days. The company’s balance sheet is one of the worst in the industry; its competitors, like Canopy (NYSE: CGC) and Cronos (NASDAQ: CRON), were able to partner and get capital infusions with the likes of Constellation Brands (NYSE: STZ) and Altria (NYSE:MO), respectively, and as a result can concentrate on growth rather than cost-cutting. Aurora has yet to find a partner.
The company is a share dilution machine, constantly issuing shares to raise capital and decreasing existing share value; its last issuance diluted existing shareholders out of 28% ownership. Pot production has drastically exceeded sales in the past and continues to do so today; this creates a tremendous loss in the industry as potency drops with time spent in warehouse storage, and Aurora is not immune as one of the leading cannabis companies. The company has made many poor acquisitions, its last being MedReleaf in 2018, with roughly $1.5 billion of the purchase price considered as goodwill; analysts expect this bad deal to generate over a $1 billion writedown.
So, is Aurora Cannabis a good investment?
I believe cannabis has a huge future and although Aurora has started to show some promise again, it’s the wrong stock to invest in. Even with potential legalization and deregulation creating huge tailwinds for the industry, this company has made too many poor decisions in the past to make any significant gains in the near future. If you want to invest in the sector, I would suggest you put your money into Innovative Industrial Properties (NYSE: IIPR), a REIT for cannabis producers; its stock is up over 35% since the start of year and its revenue has surged over 1000% since it was founded in 2016.
Who is the CEO of Aurora?
As of February 2020, Michael Singer was named interim CEO.
Is Aurora profitable?
Not yet. Analysts expect the company to achieve profitability late in 2021 or 2022.
What is Aurora’s market cap?
$1.20 billion as of July 24.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies above. Read our full disclosure policy here.
Contributing Writer at MyWallSt
David fell in love with the stock market in 2000 after making $30,000 overnight on Techniclone. His favorite stocks today are Netflix, Google, Amazon, and Apple as they are the market leaders in their sectors and are safe long-term investments.