On Feb. 13, Canada-based Aurora Cannabis (NYSE:ACB) stock price hit an all-time low of $1.43, before the stock bounced back up toward the $1.65 level. What a difference a year and half has made for this cannabis producer. In October 2018, ACB stock had hit an all-time high of $12.53 and, like most other marijuana shares, enjoyed sky-high valuations. Those days have faded into the rearview mirror.
ACB is a beleaguered stock. And contrarian investors are wondering if now may be an opportune time to buy into the share price. I expect the knife to fall further for the company as bears could push the share price to possibly toward or even under under $1. Therefore, at this point I’m not a buyer of the stock but would look for ways to cut any paper losses.
Latest Earnings Were Disappointing
On Feb. 13, Aurora Cannabis released weak second quarter 2020 results. A week earlier, the group announced that founder & CEO Terry Booth was retiring and that it would cut 500 jobs. The pot producer would also be writing down about a quarter of its goodwill. Finally, management put out preliminary quarterly results which raised eyebrows.
This press release gave a lot of information to process, ultimately leading several analysts to downgrad the stock. Stifel analyst Andrew Carter cut the price target to 1 CAD (76 cents). On Feb. 6, the stock had closed at 2.00 CAD. By Feb. 13, it was down to 1.43 CAD.
Q2 results showed revenue of 56.03 million CAD, which was below the average estimate of 60.5 million CAD. Loss per share of -1.18 CAD was also much worse than the expected -8 cents CAD per share.
The net loss was a colossal 1.3 billion CAD. And the company saw a 4% increase in the cost to produce a gram of cannabis.
Over the past year, analysts have also been extremely concerned with the cash burn at Aurora Cannabis. To reduce capital expenditures, management is evaluating its current investment projects. Overall the results point to an ugly balance sheet and a company in financial distress. It is highly likely that the company might have raise additional capital in the coming quarters.
Since the earnings report, ACB stock price has increased about 7%. However, it was most likely short covering and not the start of a genuine up move. YTD, the stock is down about 27%.
Markets Want Results
In 2019, marijuana industry experienced major growing pains as the Street made clear that it urgently needed results and not just promises. As novelty of legal pot has worn off, excessive inventory levels and weaker-than-expected market growth in Canada have been the two themes of the past year. Regular users seem to be drawn back to the black market where prices are cheaper.
For many investors, ACB stock and its peers lack the stability, transparency and fundamentals to support a long-term investment thesis. Also, there is no clear path to profitability in the horizon any time soon for Aurora.
Thus far, 2020 has also been choppy for many of these cannabis companies. For example, the Alternative Harvest ETF (NYSEARCA:MJ) and ACB stock have betas of 2.1 and 1.5, respectively. These numbers indicate high volatility for an industry and stock where investors do not have much visibility.
It is important to remember that cannabis is an agricultural commodity that has only been recently legalized in Canada. That being said, annual Canadian sales are not likely to exceed 4 billion CAD.
Elsewhere, there is no demand for recreational pot — a fact that is not likely to change any time soon. ACB’s Q2 results showed that it produced 30,691 kilograms of cannabis as compared to 41,436 kilograms in the prior quarter.
Also, medical cannabis sales worldwide are also limited. Canadian and international medical cannabis had a net revenue of 27.4 million CAD. Canadian medical net revenue was sequentially flat at 25.6 million CAD. And international medical net revenue was down from 5.0 million CAD to 1.8 million CAD due to sales interruption.
Going forward, ACB stock’s valuations should and will ultimately be based on actual demand and supply parameters, as well as legal developments, and not on hype. However, management ended the Q2 result with more bad news as the company expects “modest to no growth” in the third quarter compared to the second quarter.
The Bottom Line on Aurora Stock
In the coming weeks, I expect Aurora stock to trade between $1.00 -$1.50. From a valuation standpoint, the stock is not necessarily a bargain at the high end of that and the company has little financial freedom or cash position for any more errors. Therefore, the share price will likely continue to be event driven with a down bias.
For Aurora stock, $1.50-1.75 levels would be likely to act as strong resistance. Only after the stock is able to push through and stay above $1.75 and preferably $2 can Aurora shareholders begin to relax for the longer-term prospects.
But I am not optimistic. If I were already an investor, I’d look to cut my losses. Those investors who are experienced in hedging with options may also consider using covered calls or put spreads.
Rest of the year should possibly show if Aurora Cannabis has already passed the point of no return.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
