Why Aurora Cannabis Fell 20.7% in September – The Motley Fool

Why Aurora Cannabis Fell 20.7% in September - The Motley Fool
Aurora Cannabis (ACB): Great Assets, Tone-Deaf Management
Aurora Cannabis (NYSE:ACB) saw its stock fall 20.7% in the month of September, according to data from S&P Global Market Intelligence. The worlds leading producer of cannabis sold off after a tough month for pot stocks and unprofitable growth stocks in general. In addition, Aurora released a fiscal fourth-quarter earnings report that didnt quite match the markets lofty expectations.

In its fiscal fourth quarter, Aurora reported revenue of $99 million and an adjusted EBITDA loss of $11.7 million. Those figures disappointed analysts, as Aurora had forecast $100 million to $107 million just a few weeks prior when the quarter ended. Aurora had also given itself a target to become adjusted EBITDA-positive by the end of the fiscal year, and as you can see, it missed that goal as well.

Aurora management gave a pretty decent explanation of the shortfall — the company actually met the high end of its cannabis sales guidance of $95 million, but the companys noncannabis revenue, encompassing patient counseling, analytic testing, and construction engineering services, came in lighter than expected. Noncannabis revenue can be a bit inconsistent, and since its not a core business, management should probably get a pass. Nevertheless, missing your targets, especially in a new and evolving industry such as cannabis, isnt going to do any favors for your credibility with Wall Street, and Auroras stock was punished.

Many countries are also considering legalizing marijuana for medical and recreational purposes. Amid this backdrop, Grand View Research expects the value of the global legal marijuana market to be $66.3 billion by 2025. This expectation implies a compound annual growth rate of 24.1% from 2019 to 2025. Hence, cannabis stocks remain an attractive investment opportunity despite their currently trading at lower levels than their historic valuations. To learn more about marijuanas expected legalization in Mexico, read Marijuana Legalization: Mexico Will Seal the Deal!

Dont Expect a Sharp Reversal in Aurora Cannabis Stock

All Canadian cannabis companies are dealing with some oversupply in the market due to a delay in approvals for Canadian brick-and-mortar licenses and cultivation licenses. This bottleneck explains why several Canadian companies have disappointed investors this summer. Eventually, however, that will change as more licenses get approved.

Canada is also set to move forward with “Legalization 2.0” in mid-December. That milestone will allow retail outlets to sell derivative products such as edibles, vapes, infused beverages, and other products derived from cannabis, and not just the dried flower that was legalized last year. Aurora is currently making these products in preparation for the launch.

All things considered, Aurora still delivered a solid quarter, and its still closer to profitability than its other Canadian large-scale peers. Moreover, Auroras track record of flawless execution — the companys never had a crop loss — as well as its status as the largest and lowest-cost cannabis producer, should put it in good stead as the Canadian market moves forward.

Cannabis stocks remained under pressure in September. Sector ETFs were mostly down month-over-month. The Cambria Cannabis ETF (TOKE) closed at $18.85 on September 30, 12.49% lower than its level of $21.54 on August 30. The ETFMG Alternative Harvest ETF (MJ) also fell 12.48% from $23.72 on August 30 to $20.76 on September 30. Weak investor sentiment for the cannabis sector was also a factor in the last week of September.

Aurora Cannabis has been on a major facility construction path over the last few years. The company updated the market on the construction progress, but Aurora Cannabis still appears focused on global market leadership over prudently managing investors capital.

The cannabis company spent C$414 million on capital spending in the last fiscal year alone causing analysts like Chris Carey from Bank of America to question whether the company will have liquidity issues in 2020. The latest update highlights how the majority of facility spending has passed, but the news suggests a ramp in operating expenses on the horizon.

Both the Aurora Sky and the Nordic Sky cultivation facilities are nearing completion adding a total of 2.6 million square feet of production space. Aurora Cannabis already had quarterly production targeted for 37,500 kg in the September quarter and these two massive facilities will increase quarterly production goals to nearly 175,000 kg by mid-2020.

The decline in Aurora Cannabis (NYSE:ACB) stock has been unabated in 2019. ACB stock is down 57% at $4.50 from its 2019 highs near $10 in March. I do believe that the selling is overdone. However, I don’t see any reason for a sharp rally in ACB stock. In other words, the stock can trade marginally higher or sideways, but is unlikely to be a portfolio catalyst anytime soon.

Other facilities like the Anandia Laboratories and Canadian Cannabis Innovation Center are opening during the current quarter. The new facilities add over 45,000 square feet of cultivation, lab and office space that will add substantially to operating costs without contributing to near-term revenues.

A potential challenge for companies that ethically follow regulations are companies that flout norms. Just as an example, the FDA has issued warning letters to firms that have been marketing unapproved drugs using cannabidiol. These products “are not approved by FDA for the diagnosis, cure, mitigation, treatment, or prevention of any disease.”

On top of this, the company is testing outdoor cultivation at multiple sites in Canada. In addition, the company is also developing the Aurora Polaris park for industrial-scale production of edibles and vape products with those costs ramping up in October for the market opening up in mid-December.

While there is a big potential market, it remains untested. The medicinal benefits of cannabis are also debatable. Therefore, I believe that be it the medicinal or consumer segment, growth is likely to be more muted. The markets are discounting steady progress in the cannabis industry. Earlier, they discounted aggressive growth.

While the company is busy focusing the market on either the organic, medical or global cannabis markets via sophisticated facilities and testing operations, Aurora Cannabis dumped C$20 million in revenues on the wholesale bulk market last quarter.  The building of all these facilities wasnt undertaken to sell product on the cheap in the wholesale market.

The mismatch with the actual sales figures and relatively weak margins in the upper 50% range is why the stock now trades under $5. The corporate update still has the company focusing on volumes including the planting of 9,000 acres of hemp in Eastern Europe versus generating positive cash flows and reigning in growth to better match global growth opportunities with escalating costs.

In 2019, Charles Broderick, an alumnus of Massachusetts Institute of Technology and Harvard University, made a donation of $9 million towards cannabis research. The objective of the donation is to bridge the “critical gaps in knowledge” on the impact of cannabis for medicinal and recreational use.

Unsurprisingly, we can see that best-performing investors have Very Negative sentiment on Aurora stock right now according to TipRanks Smart Portfolio.

Meanwhile, TipRanks reveals ACB as a stock that has not drawn a vote of confidence among Wall Street opinion. Out of 11 analysts polled in the last 3 months, 3 are bullish on the stock, 6 remain sidelined, while 2 are bearish. (See ACBs price targets and analyst ratings)

Aurora Cannabis anticipates the global medical cannabis opportunity to be worth as much as $70 billion CAD. And the company expects the broader consumer cannabis opportunity to be worth $115 billion CAD. Despite this potential, ACB stock has been sliding for the last six months.

The key investor takeaway is that Aurora Cannabis appears full speed ahead with massive production and cultivation growth. In none of the numerous notes about facilities or global operations did Aurora Cannabis actually discuss reigning in production for disappointing global demand.

Considering the legitimate questions on cash, the stock is likely to fail in a rally back above $5 where the market value would top $5 billion when the company is only expected to reach FY20 sales of $437 million now.

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