Aurora Cannabis: Is This the Right Time to Invest?

Amid a subdued cannabis sector, Aurora Cannabis (ACB) stock has taken a serious hit and is down 36.4% this month. Is this the right time to invest?

Sushree Mohanty - Author

Nov. 20 2020, Updated 1:12 p.m. ET

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The cannabis industry has had a roller coaster ride this year. Aurora Cannabis (ACB), Canopy Growth, and Cronos Group’s (CRON) results were expected to be a ray of hope for the industry. However, their results disappointed. Aurora Cannabis stock took a serious hit and is down 36.4% this month. Is this the right time to invest in Aurora Cannabis stock?

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ACB’s first-quarter results

In its first-quarter results, Aurora Cannabis’s revenue increased 153.57% YoY (year-over-year). However, it missed analysts’ estimates. While Aurora Cannabis’ YoY revenue rose, it reported EBITDA of -39.67 million Canadian dollars. To learn more, read Aurora Cannabis Cannabis: Good or Bad News for Its Q1 Earnings?

A positive EBITDA is important to investors, as it reveals that the company’s operating costs are lower. A Nasdaq report noted that Aurora Cannabis’s oversupply is a concern. Also, its profitability is making investors skeptical.

Furthermore, in its earnings call, the company discussed how changing consumer preferences affected revenue. The decline in consumer cannabis sales and wholesale sales affected its sales. Also, Jeffries analyst Owen Bennett feels the company’s debenture conversion initiative could worry investors.

According to MarketWatch, MKM Partners analyst Bill Kirk noted, “If Aurora is less eager to deploy capital to this industry, we believe investors should also be reluctant to place capital in the industry.”

Aurora Cannabis’s rising debt is a concern

With ACB stock hitting all-time lows, it is losing a lot of cash. To add to the burden is Aurora Cannabis’s rising debt. Currently, the company’s net debt is 603.8 million Canadian dollars, which worries investors. To learn more, please read Aurora Cannabis Cannabis: Why Investors Must Watch Its Debt.

Comparatively, its peers Canopy Growth and Cronos Group do not have a higher debt burden. Moreover, Canopy Growth (CGC) (WEED) is backed by a huge investment from Constellation Brands (STZ), which is its largest shareholder. Canopy Growth has a strong footing in the industry and room for more investment for growth. However, the company announced in its second quarter that capital spending would be stopped for the next 12 to 18 months.

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Currently, slower store rollouts are a concern in Canada. Aurora Cannabis, Canopy Growth, Cronos Group, and others are gearing up to launch their edibles products by end of this year. However, slower store openings could challenge revenues. During ACB’s Q1 of fiscal 2020 earnings call, CFO Glen Ibbott noted, “Aurora would need to generate about $130 million of revenue to flip profitability.” Will that be possible for ACB’s edibles expansion? We will have to wait and see.

Aurora Cannabis’s price target reduced

Although Aurora Cannabis’s results weren’t all bad news, analysts PI Financial and Cowen & Co. cut their target prices for the stock. These target price cuts mostly occurred because the company missed its revenue estimates.

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How to invest in marijuana stocks

Most of the prominent players in the cannabis industry are based in Canada. On a federal level, marijuana is still illegal in the US. As a result, many investors wonder how to invest in pot stocks, as well as which pot stocks would be a better investment.

You can choose to invest in various kinds of marijuana companies, as well as the ETFs that invest in cannabis companies. One example is the Horizons Marijuana Life Sciences Index ETF (HMMJ), which tracks the North American marijuana sector.

Investors can also choose to invest in food and beverage companies that partner with marijuana companies. To learn more, please read Cannabis Investment: How to Buy ACB, CGC, and Others.

Cannabis is an evolving industry. According to New Frontier Data, the Canadian cannabis sector has a bright future. So, Canada-based marijuana companies’ growth prospects look good. Recently, Cowen & Co. increased its sales forecast for the US cannabis sector for 2030.

This increased guidance is driven by the popularity that marijuana is gaining in the US, with increased public sentiment toward legalization. Cowen expects the US cannabis market to generate $85 billion in sales by 2030. To learn more, please read Cowen Boosts Estimate for US Cannabis Market in 2030.

Canada’s Cannabis 2.0 launch was successful. However, marijuana companies cannot reap the benefits from this initiative until later next year. Meanwhile, the hopes for Cannabis 3.0 hopes are rising. To know more, please read Cannabis 3.0: Is It on the Horizon?

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Aurora Cannabis’s stock performance

ACB missed its revenue estimates. Additionally, its guidance for the upcoming quarters looked uncertain, making investors skeptical. The stock took a hit and is down 30.7% since it reported its earnings on November 14.

Yesterday, its stock continued trading in the red and was down 15% to its two-year low. ACB stock closed with a loss of 16.4% yesterday. CGC and Cronos Group stock declined by 7.2% and 2.2%, respectively, yesterday. Until the store rollouts and the Cannabis 2.0 sales kickoff, we believe it would be wise to wait before investing in ACB or other cannabis stocks.

What do we think?

It’s not all negative news in the cannabis industry, although the picture looks dull right now. If the Cannabis 2.0 sales kickoff succeeds and federal cannabis legalization effort steps up in the US, the cannabis industry could see daylight again.

In a sector such as cannabis, the risk factor is high. In our view, investors who have an appetite for risk and can wait to reap the benefits can choose marijuana stocks like ACB and CGC. However, like any other investment, investors should conduct thorough research into weed stocks before making any decisions.

For more cannabis-related news and updates, be sure to check out 420 Investor Daily.


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