As marijuana stocks have struggled in recent months, much of the attention has revolved around Aurora Cannabis (NYSE: ACB ). The company has made several key acquisitions to make itself the world’s largest producer of dried marijuana. This should help ensure its future as competition forces the takeovers and bankruptcies of smaller players.
However, Aurora Cannabis is not Aurora Cannabis stock. The company’s expansion has cost shareholders in share price declines and dilution of the equity. Until Aurora can fund growth through profit, investors should avoid ACB stock.
Aurora Cannabis Should Remain a Top Canadian Marijuana Company
Aurora remains one of the more robust companies in this sector. As mentioned earlier, it leads in production, cultivating larger quantities of dried cannabis than even Canopy Growth (NYSE: CGC ). Aurora Cannabis also operates in 25 countries.
Due to the oversupply of dried cannabis, it has rightly decided to turn its focus away from Canada and the U.S. The recent deal to provide 400 kilograms of medical marijuana to the Italian government pales in comparison to 25,000 kilograms of quarterly production. However, it constitutes a start to pare down the supply glut.
Aurora gave investors a preview of the report to come as it issued fourth-quarter guidance . The company estimated quarterly production would come in between 25,000 and 30,000 kilograms. Analysts had expected 25,000 kilograms. Revenue guidance of between 100 million CAD ($75.15 million) and 107 million CAD fell short of the consensus 112 million CAD. Still, it represents massive growth from the 19.1 million CAD reported in the same quarter last year.
Aurora’s Growth Comes at the Expense of ACB Stock
However, what is suitable for a company may not benefit their stock. That seems especially true for Aurora Cannabis. I have long expressed concerns about high valuations. In a bull market, investors may tolerate high multiples in emerging sectors.
However, the valuation faces pressure on more than one front. Turmoil related to the U.S.-China trade war and the protests in Hong Kong has brought the overall market down in recent days. With ACB stock trading at more than 53-times sales, both Aurora Cannabis and its high-value peers could face a steep drop on that factor alone.
Analysts have also begun to notice. Piper Jaffray just initiated coverage. Despite speaking favorably about its “ industry-leading capacity ” and higher gross margins compared with its Canadian peers, it handed Aurora Cannabis with a “neutral” rating. It also thinks ACB stock trades at a premium compared to Canopy, Cronos Group (NASDAQ: CRON ), and Tilray (NASDAQ: TLRY ).
Our own Vince Martin believes the company will dilute Aurora Cannabis stock further. Barring a massive rise in the stock price, Aurora will have to pay back 230 million CAD ($172.9 million) of debt on March 9, 2020. ACB will likely have to issue more shares to pay this debt. As long as Aurora Cannabis stock bulls have to contend with significant amounts of dilution, they will find it difficult to profit from ACB.
Investors should avoid ACB stock until the company earns quarterly profits. Investors need to remain aware of the differences between Aurora Cannabis the company and its stock. With the number of shares growing by about eight-fold in three years, gaining traction with shares has become difficult.
However, the dilution has benefitted Aurora Cannabis. The cash raised helped to fund 15 acquisitions , including the 3.2 billion CAD ($2.4 billion) MedReleaf deal. This has made Aurora a world leader in weed production and has given the company a presence in several countries.
One day, after the hype around marijuana stocks has abated, I think ACB stock will become a profitable investment. Once it earns profits and pays dividends, it could even become the Altria (NYSE: MO ) of weed. However, at this price level and under these conditions, investors should stay away from Aurora Cannabis.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting .
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