Is Aurora Cannabis a Buy Under $8?

Based in Edmonton, Canada, Aurora Cannabis Inc. (ACB) is a vertically integrated producer and seller of medical cannabis worldwide. While ACB’s medical businesses in Canada and Europe delivered high revenues and growth in the third quarter of 2021, it suffered in other markets due to COVID-19 headwinds. Its consumer cannabis net revenue declined CAD20.5 million ($16.43 million) to CAD18.0 million ($14.43 million) from the prior-year period, due primarily to a reduction in orders with slower demand in the consumer cannabis market and a decrease in cannabis derivative sales.

ACB’s share price has slumped 15.5% so far this year and 22.4% over the past month. Closing yesterday’s trading session at $7.02, ACB’s stock is trading 63% below its 52-week high of $18.98, which it hit on February 10. Although the cannabis operator has been making substantial progress in diversifying its portfolio by launching new proprietary cultivars and expanding its footprint in the rapidly growing medical cannabis market in the U.K., it has been struggling to generate consistent revenue growth.

While investors remain optimistic about the positive momentum in legalizing cannabis at a federal level, uncertainty surrounding the Senate’s stance on the Cannabis Administration and Opportunity Act, which was introduced earlier last month, could lead to volatility in cannabis stocks in the coming months. So, ACB’s shares could retreat further in the near term.

Click here to check out our Cannabis Industry Report for 2021

Here is what we think could influence ACB’s performance in the near term:

Uncertainty Surrounding Federal Level Legalization of Cannabis

On July 14, U.S. Senate Majority Leader Chuck Schumer, Finance Chairman Ron Wyden, and New Jersey Senator Cory Booker released a discussion draft of the Cannabis Administration and Opportunity Act, which is proposed legislation that is aimed at removing cannabis from the Controlled Substances Act and easing restrictive drug policies that have disproportionally impacted communities of color and the poor. However, the bill could face opposition from Republicans and some Democrats. Furthermore,  President Biden has yet to show his support for the bill. Thus, while Senator Schumer will require 60 votes to pass it through the Senate, the likelihood of Senate approval remains uncertain. This may hinder the  cannabis operators’ prospects, including ACB’s.

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Bleak Financials

ACB’s total revenue declined 24.5% year-over-year to CAD55.16 million ($44.21 million) in the third quarter ended March 31, 2021. It reported a CAD85.46 million ($68.5 million) gross loss, compared to a CAD19.65 million ($15.75 million) gross profit in the prior-year period. The company’s loss from operations rose 71.4% year-over-year to CAD142.96 million ($114.62 million).  ACB’s net loss increased 18.2% from the prior-year quarter to CAD164.65 million ($132.01 million) over this period.

ACB’s 0.1% trailing-12-month asset turnover is 79.6% lower than the 0.4% industry average. Also, the company’s trailing-12-month gross profit margin and EBITDA margin are negative 56.8% and 138.7 %, respectively, and its  trailing-12-month ROA, ROE, and ROTC are negative 85.6%, 79.9%, and 7.6%, respectively.

Business Inefficiencies

ACB’s medical cannabis operations were impacted in the third quarter of 2021 due to a $3.2 million decline in international medical cannabis net revenue under the Israeli Medical Supply Agreement. In addition, in the consumer cannabis market, it saw  a $2.0 million decrease in cannabis derivative sales and a $1.5 million decrease in net revenue from Daily Special branded products launched in the same period last year. Moreover, its Product Swap initiative, under which it pulled low-potency products back from certain provincial distributors, resulted in a reduction in orders from the provinces. And  the impact of COVID-19 lockdown restrictions severely affected ACB’s consumer cannabis business operations in its last reported quarter.

POWR Ratings Reflect Bleak Prospects

ACB has an overall F rating, which translates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

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Our proprietary rating system also evaluates each stock based on eight different categories. ACB has a D grade for Quality. This justifies the stock’s negative profit margin.

It has a D grade for Stability, which is in sync with its 3.12 five-year monthly beta.

Also, the company has a D Momentum grade, which is consistent with its negative price returns over the past month.

In addition to the grades we’ve highlighted, one can check out additional ACB ratings for Sentiment, Growth, and Value here. The stock is ranked last of the 220 stocks in the F-rated Medical – Pharmaceuticals industry.

Click here to view the top-rated stocks in the Medical – Pharmaceuticals industry.

Click here to checkout our Healthcare Sector Report for 2021

Bottom Line

ACB’s stock has lost 33.4% over the past year. Also, analysts expect its EPS to remain negative for its  fiscal period ending June 2022. While the company has been making significant progress  in the international medical business, its negative profit margin and bleak revenue-generating prospects continue to be major concerns for investors. Also, uncertainty surrounding the decriminalization of marijuana at the federal level could pose a risk to ACB’s stock in the near term. So, we think it could be wise to avoid the stock now.

Click here to check out our Cannabis Industry Report for 2021

ACB shares were unchanged in premarket trading Monday. Year-to-date, ACB has declined -15.16%, versus a 18.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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