Among the dozens of pot stocks for investors to choose from, none tends to be more popular than Aurora Cannabis (NYSE: ACB). Even though Aurora is only the second-largest marijuana stock by market cap, behind Canopy Growth, it has an avid group of supporters among the millennial crowd. In fact, Aurora Cannabis surpassed tech giant Apple on free online trading app Robinhood as the most commonly owned stock.
Superficially, there are a lot of reasons to be excited about Auroras potential. To begin with, its unmatched when it comes to production capacity. As of its most recent quarter, management has forecast at least 625,000 kilos of annual run-rate output by the midpoint of 2020. That would be up from the more than 150,000 kilos its producing on a run-rate basis as of March 31. With the exception of Canopy Growth, no other grower will even be within a stones throw of its peak annual output. Presumably, this should make Aurora Cannabis a magnet for lucrative supply deals both domestically and abroad.
Speaking of looking abroad, Aurora also leads the industry with its international presence. Inclusive of its home market of Canada, it has a production or distribution presence in 24 markets. These foreign countries should come in particularly handy if and when dried flower becomes a commoditized and oversupplied product in the Canadian market.
Investors also appreciate Auroras focus on the medical marijuana community in Canada and abroad. Even though the adult-use market has a considerably larger number of prospective customers than the medical pot market, medical patients tend to use and buy cannabis more often, and theyre much more willing to purchase derivative products rather than dried flower. These derivatives, such as oils, edibles, topicals, concentrates, infused beverages, vapes, and so on, bear much juicier margins than traditional dried flower.
And lastly, supporters of Aurora Cannabis are fully expecting this market leader to strike a brand-name deal sometime in 2019. Having watched Canopy Growth receive a sizable equity investment from Constellation Brands, and Altria pump $1.8 billion into Cronos Group for a 45% nondiluted stake in the company, Auroras shareholders are ready for their companys eventual deal — especially after hiring billionaire activist investor Nelson Peltz as a strategic advisor in mid-March.
Presumably, it looks as if nothing could go wrong for the most popular pot stock. That is, until you take a closer look at the companys short interest figures.
According to data from Morningstar, 79.6 million shares were held by short-sellers (investors who want Auroras stock to fall) as of March 28. However, by April 29, the number of shares short had surged to 88.57 million, or close to 9% of the companys outstanding shares.
Why have an additional 9 million shares of a clearly popular pot stock suddenly been bet against its success?
For starters, its handily outperformed many of its peers this year, and as of mid-March had doubled on a year-to-date basis. Some short-sellers may be taking the opportunity to bet on a short-term pullback fueled by profit-taking. Since short-selling losses arent capped, and theres a margin interest fee associated with betting against a stock, short-sellers tend to be oriented more toward shorter-term swings than making money by seeing a stock fall over the long run.
Another reason to be down on Aurora Cannabis is the companys income statement. Although Aurora has been selling and producing more marijuana, its still losing a lot of money on an operating basis, if fair-value adjustments and one-time benefits and investment gains are removed from the equation. Despite a projected positive recurring EBITDA (earnings before interest, taxes, depreciation, and amortization) for the fiscal fourth quarter (April 1-June 30), operating profitability looks to be quite a ways off.
A third possibility for the increasing pessimism relates to Canadas multiple supply chain issues. A monstrous backlog of cultivation, processing, and sales licenses with regulator Health Canada has slowed the process by which growers have been able to bring product to market. Three of Auroras top grow farms are still unlicensed for cultivation. Packaging shortages have also kept unprocessed cannabis sitting on the sidelines. All told, Canadian weed sales have trended far below initial expectations, and its directly hurt major players like Aurora.
A fourth and final reason for the increased short interest might be (cue the sighs and eye-rolls) share-based dilution. Since Aurora hasnt struck a deal with a name-brand company in the food or beverage business, its had to predominantly rely on dilutive forms of financing to fund its 15 acquisitions since August 2016, as well as its numerous organic projects. Each and every one of these deals and projects has been costly, leading to roughly 1 billion shares being issued by the company in less than five years. Despite Auroras market cap soaring, its stock has gone almost nowhere since the beginning of 2018. Short-sellers might simply be counting on this increase in Auroras outstanding share count to weigh on existing investors.
In short (pun intended), take heed that pessimism surrounding the most popular pot stock in the world is building.
Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Constellation Brands. The Motley Fool has a disclosure policy.
Its been a tough few months for Aurora Cannabis (NYSE:ACB) investors. After hitting a high point in April, the stock has been on a gradual but noticeable downtrend, following the companys most recent earnings report that showed high growth but missed analyst expectations. Although the companys sales jumped 20% quarter over quarter, its net loss was $150 million, showing the company is still a ways off from profitability.
Not all news from Aurora lately has been bad, however. In addition to growing its sales, the company has been working on acquisitions and partnerships to diversify its product offerings. One of the companys most interesting partnerships is with mixed-martial-arts (MMA) league Ultimate Fighting Championship or UFC, whose athletes are well known for endorsing sporting supplements. (UFC is owned by the Endeavor Group, which is planning an initial public offering.)
The deal in question is purported to be a research collaboration, where Aurora and the UFCs sports performance team will work together to see whether cannabidiol (CBD) products have any benefit to MMA fighters. However, the potential for new performance-enhancing products is not the only benefit that could come from this.
One obvious benefit that could come from Auroras UFC partnership is visibility. In a crowded market, having a recognizable brand helps you stand out, and if the success of Nike teaches us anything, its that hitching yourself to athletics can help with that.
Although Auroras partnership with the UFC is presently focused on research, its possible that a number of branding benefits could come as a result, such as Aurora having its name mentioned on air during UFC broadcasts or branded Aurora products having UFC fighter endorsements.
Of course, the intended outcome of the Aurora-UFC partnership is to find applications for hemp-derived CBD oil or other products in sports medicine. Preliminary research has shown that CBD may be cardioprotective, meaning it helps strengthen the heart, and should this be proven conclusively, it would have obvious implications for sports medicine.
Other areas where CBD is being researched include depression and anxiety, two conditions that may have a bearing on athletic performance as well. Assuming that Auroras research with the UFC sports medicine team is conclusive, it could result in patent-protected products that take off in the world of sports health.
One major benefit of Auroras research with the UFC is that it is focused on high-margin products. For cannabis growers, two product areas are most profitable: CBD products and pre-rolled joints. By contrast, raw cannabis flower is comparatively cheap and low margin. Since Auroras partnership with the UFC is focused on CBD, any resultant products would be sold in one of the higher-margin cannabis market segments and could prove profitable for Aurora if they take off.
This could be a major boon to the company, which is struggling to achieve consistent profits despite soaring revenue.
A version of this article originally appeared on The Motley Fool Canada site. For more coverage like this head to Fool.ca.