We know that Aurora Cannabis (ACB) is a popular stock among retail investors by its inclusion in the Robinhood 100, a list of the most popular stocks on the Robinhood trading platform. The question is, should it be?
We saw the stock shoot up earlier this month after Biden won the election, and it was up another 28.6% yesterday as his transition team was given access to government funds, signaling the effective end of President’s Trump’s challenge to the election results.
While many cannabis investors believe a Biden administration will be beneficial for the cannabis industry, and therefore ACB, the company still has its share of problems. ACB’s expensive acquisitions over the past few years is hurting its bottom line. These acquisitions created billions of goodwill, which continues to be written down by the company.
In addition, the company has not been able to generate substantial international revenues either.
With quarter after quarter of hefty losses and little to show, the stock has been on a roller coaster ride over the past couple years. Although the company has drastically reduced its debt, cut SG&A expenses, and managed to somewhat stabilize revenues, the future is still murky.
ACB optimists are hoping a new strategy, announced by Miguel Martin, their new full-time CEO, will “right the ship.” The strategy is to focus on premium cannabis brands. These products tend to carry a higher margin which should generate more profits for the company.
However, I am not sold on this strategy. The black market for cannabis in Canada still thrives and in order to capture market share, companies have had to prove to the consumer that they can offer better quality products at a lower price. The largest growth in revenue for many cannabis companies in Canada has come from their value brands, which paints a conflicting picture when it comes to ACB’s new strategy.
One analyst who has been bearish from the start, believes that ACB is going to $0. Last week, GLJ Research analyst Gordon Johnson stated that although ACB delivered analyst beating revenues of C$67.8 million in its most recent quarter, the company suffered a tremendous bottom-line miss. The company reported a loss of $0.93 per share, which equates to more than twice what the analysts predicted. Cash burn also increased dramatically up over 50% the last quarter to $124.3 Million.
Even though the Democratic party is set to create a much more favorable environment for cannabis stocks, Johnson remains extremely bearish on ACB. Johnson says, “Sell. Or even, sell short, because this stock is going to $0.”
Despite Biden’s win, the United States is still a long way off from federal legalization of cannabis. Without a clear path to revenue from the Democratic win, investors might be getting ahead of themselves, once again. Finally, Johnson states that “barring a change in Canadian national law, ACB cannot legally operate” in the United States.
Is Johnson the only bearish analyst that thinks ACB could be in for further trouble? According to StockNews new Price Target feature, which shows various analysts’ ratings of the stock, it’s evident that bearish sentiment is already present. Of the 19 analysts covering ACB, 14 rate the stock a “Hold,” 4 rate it a “Sell,” and 4 rate it a “Strong Sell.” The average price target is $8.01, which indicates a potential downside of 13%.
Overall, I remain neutral on ACB and believe that the company needs to record profitability and they need to do it fast. The company no longer has the cash or time to get things wrong. ACB remains highly volatile, and due to their situation, they remain a highly risky and speculative company. For investors who can’t stomach volatility, they may want to watch from the sidelines for now.
(Disclosure: The author is long ACB)
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ACB shares . Year-to-date, ACB has declined -64.39%, versus a 14.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More…
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