Back in 2019, Aurora Cannabis was the rock star of the cannabis industry. At its peak, Aurora nabbed a market cap of $10 billion.
The company had delivered enormous gains to early investors. It also and ranked as the #1 held stock on the popular stock trading app, Robinhood.
The enthusiasm was driven by Aurora’s impressive portfolio of cannabis businesses and assets.
That portfolio included 15 global cannabis cultivation centers capable of producing more than 700,000 kilograms of cannabis per year. Aurora had also secured exclusive cannabis permits in potentially lucrative international markets including Germany and Australia. Aurora invested hundreds of millions to build an unparalleled global cannabis production and distribution network.
However, customers never showed up.
Canada’s legal cannabis industry got off to a painfully slow start and continues to be much smaller than projected. German and Australian markets are also growing slower than expected.
The U.S. is the place where cannabis sales are truly booming – unfortunately, Aurora doesn’t have a presence.
Weak sales have been crushing for Aurora.
Here are some more details from Bloomberg.
Aurora said in a statement that it expects to take a massive writedown between $1.6 billion to $1.8 billion of goodwill and intangible assets when it reports its fiscal fourth-quarter results on Sept. 22. The writedown includes an inventory charge of approximately $140 million and a $90 million asset writedown, Aurora said. Aurora previously wrote down $1 billion in assets earlier this year when it announced it would layoff 500 staff and close several facilities.
Aurora forecasts fourth-quarter revenue of between $70 million and $72 million, a slight decline from the $75.5 million it generated in the prior quarter. The company also said it ended its high-profile deal with the UFC to collaborate on several CBD products, and is expected to make a US$30-million payment to terminate the contract in its next fiscal quarter.
The bad news has caused investors to flee Aurora. Shares are down 71% in 2020 and 90% in the last 12 months. Shareholders have been crushed.
Today, investors are asking an important question about Aurora – is this the bottom?
Top 2 Reasons to Continue Avoiding Aurora Cannabis
Despite the huge losses, I still see a high probability of more weakness because of two devastating forces.
Sales Growth Remains Elusive
Canadian cannabis sales have been steadily improving as companies such as Canopy and Aurora are allowed to open more dispensaries. However, the size of the Canadian cannabis markets remains far short of original expectations and quite small relative to the U.S. That’s a very big problem for Aurora. The company needs a spark to ignite sales, and I don’t see a trigger in any of its key markets.
Aurora Has a History of Diluting Shareholders and Will Probably Have To Do It Again
With sales growth elusive, Aurora has had to rely on selling more shares to raise capital to support operations. For example, in April Aurora announced that it was selling $350 million in new shares. That dilution accounted for about 25% of Aurora’s share count at time, and it sent shares lower by 13% on the day. Looking forward, I see a high probability of more share dilution as Aurora continues to struggle with anemic sales growth.
These two forces – weak sales growth and share dilution – are the equivalent of a death spiral for a company and a stock. That is the current trajectory Aurora is following.
The Big Picture on Aurora Cannabis
Aurora Cannabis was the rock star of the global cannabis industry 18 months ago.
Today, the company is a shell of its former self, with overcapacity, weak sales growth, and a bloated balance sheet.
Even though shares have been crushed, I see a high probability of more weakness in the future. For the time being, this is a stock we are avoiding at Cannabis Stock Trades.
About the Author & Cannabis Stock Trades
Michael Vodicka is an equity analyst with more than 20 years of experience trading and investing. His research has been featured in some of the industry’s most respected publications. He has been investing and leading investors in the cannabis sector since 2013.