Aurora Cannabis has plenty of opportunities and some major risks as well
By AARON LEVITT, InvestorPlace Contributor
For Canadian cannabis producer Aurora Cannabis (NYSE: ACB), the last few years or so have been wonderful, to say the least. ACB stock is up more than 75% this year and it is up more than 700% in the last five years. That’s some pretty torrid growth, which underscores the potential of legalized marijuana.
Aurora has some very distinct advantages that should make investors very happy and potentially lots of money as the cannabis sector expands.
But ACB does have some warts as well. The fast-moving pot producer isn’t all squeaky clean. And despite its pedigree and recent returns, some of these issues are major ones. And a few could derail the good times at Aurora.
The question for investors is whether the pros outweigh the cons with ACB stock. With that, here are some of the major pluses and minuses for the cannabis producer.
Two Big Pros for Aurora Cannabis Stock
Aurora Is the Marijuana Producer: When it comes to cannabis, Aurora is the biggest. As it has grown over the last few years, the firm has expanded its operations and now has operations in 24 different countries. That’s a big deal as analysts peg the global marijuana market being worth around $63.5 billion by 2024. ACB is up to the challenge of providing plenty of pot to these consumers. According to its last presentation, Aurora’s 11 growing facilities have the ability to produce 500,000 kilos of marijuana per year. Recent expansion/buyouts could put that closer to 750,000 kilos. That’s an enviable position versus many of its rivals and it provides a huge scale advantage. That scale is working in its home town. Right now, ACB sells about 20% of all the weed legally sold in Canada.
In the end, this big moat should allow Aurora to gain plenty of market share globally and become the No. 1 seller of cannabis.
Aurora Cannabis Has Some Major Backers: Trian Fund Management has been one of the most successful hedge funds in consumer product firms. Much of that success comes down to head manager and founder, Nelson Peltz and his knack for finding and turning around companies with great brands. And it seems that Peltz has taken a shine to Aurora.
Mid-March, ACB announced that Peltz was coming on board as a strategic advisor, with Peltz mentioning that “Aurora has a solid execution track record, is strongly differentiated from its peers, has achieved integration throughout the value chain and is poised to go to the next level across a range of industry verticals.”
Peltz’s main job will most likely be to guide ACB through its M&A plans, designing its consumer-facing brands and perhaps push it toward various corporate partnerships. An area that it is severely lacking in. In the end, having Peltz as an advisor is a big win for Aurora and shows that its model is clearly working.
ACB’s Three Major Cons
ACB Is a Share Dilution Machine: One of the biggest hits for Aurora Cannabis has to be its continued issuance of shares. Stocks issue shares for one reason and that’s to raise capital for growth or acquisitions. That’s just what ACB has done. Aurora made a major-sized buyout of South American ICC Labs as well as several smaller firms. Fifth-teen to be exact since 2016. While you can argue that these were necessary to grow into the largest producer of weed, the problem is it has paid for many of these acquisitions with shares of stock, warrants, convertible notes and options. Add these up and ACB is looking at roughly 1 billion in total shares. That’s much higher than the 16.2 million it had at its IPO in 2014.
The problem is, with that sort of dilution it becomes hard for a firm to actually get good per-share profits. The same dollar is spread over more shares. This plays havoc with share price valuations. Given the late stage of the market and overall volatility, investors may not be willing to accept such scraps — especially if rivals are able to get better earnings-per-share numbers.
Aurora Has No Partners: One of the biggest catalysts for the cannabis sector is that many big firms from outside the sector are looking into marijuana for growth. Fellow cannabis stock, Canopy Growth (NYSE:CGC) secured a $4 billion equity investment from beverage firm Constellation Brands (NYSE:STZ), while Cronos Group (NASDAQ:CRON) scored a $1.8 billion buy-in from tobacco firm Altria (NYSE:MO). Meanwhile, Tilray (NASDAQ:TLRY) managed to score two partnerships — one with drug maker Sandoz and the other with Anheuser-Busch InBev (NYSE:BUD).
And yet, no one has come calling for ACB. For Aurora, that puts it in a hard place. Its rivals are looking to sell pot beyond its normal usage. That could and will lead to revenues from an outside sector and ultimately, a much quicker path to profits. Given ACB’s share dilution, this could be a big problem later on.
Aurora and Plunging Pot Prices: The problem is, the cat is out of the bag when it comes to legalized marijuana sales. It’s now a gold rush to fill consumer demand. And while ACB has plenty of scale, it’s still under the whims of commodity pricing — and that’s just what weed is at this point, a commodity.
Lower wholesale pricing has hurt Aurora’s bottom line last quarter. Per-gram prices for dried cannabis plunged 21% year-over-year and 26% sequentially from the first quarter. At the same time, ACB managed to see a big drop in higher-margined extract pricing as well. Here, extracts saw a big 25% year-over-year drop. While it’s still very early in the cannabis boom, these drops don’t necessarily bode well for the future. Sure, ACB has seen rising sales. However, if you’re pulling in less revenue per transaction, it’s not a good thing. Just ask any oil company what that does to your bottom line.
It’s still early in the days of legalized weed, but lower sequential and year-over-year prices is a troubling trend for the industry.
ACB Stock May Still Be a Buy
For investors looking at the marijuana sector, Aurora Cannabis stock has a lot to offer portfolios. It has a huge moat, large global presence and some very strong relationships with key corporate insiders. This should help the firm over the long haul and ultimately, boost its share price.
However, it’s a risky play, as is most of the sector. High shareholder dilution, plunging pot prices and a lack of major outside partnerships could hit the stock in a major way. All in all, ACB stock could be a buy, but investors need to be aware of its risks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.