Avoid This Former Highflier – It May Not Be a Bargain

Investors who love a great deal should be looking at the cannabis sector. Many early industry leaders are trading at a big discount relative to their 52-week highs.

However, not all ‘bargains’ are made the same.

Today I am going to reveal one of the most popular cannabis stocks, down 93% in the last 12 months. That might look like a great bargain on the surface, however, I see more losses ahead.

Aurora Cannabis (ACB) is one of the largest cannabis companies in the world. Back in 2017 and 2018, Aurora was a highflier in the cannabis sector. Shares hit a string of new all-time highs.

But the party is over. In the last 12 months, Aurora shares have fallen a mind-boggling 93%, leaving most shareholders with crushing losses.

Aurora’s low share price could be tempting for bargain hunters. However, I see more loss ahead for Aurora.

Today I am going to share three reasons why I expect Aurora to continue falling for the rest of the year.

1- Aurora Just Reported Negative Sales Growth

Investors have had sky-high expectations that Aurora would cash in on Canada’s legal cannabis market. Aurora has not been able to live up to those expectations.

Aurora reported disappointing second-quarter results in mid-February. Sales decline from $71 million to $64 million in the same period YoY. Negative sales for a growth company, operating in a growth industry, points to a serious problem – and I don’t see a quick solution.

Aurora Cannabis Announces Second Quarter 2020 Results

In the meantime, Aurora’s competitors are reporting impressive sales growth. Aphria (APHA) just reported third-quarter results that included 296% revenue growth for the same period YoY. Comparing these results shows that Aurora is struggling to keep up with the competition.

2 – Aurora Is a Financial Disaster

Aurora has one of the worst financial profiles in the cannabis industry. Aurora borrowed and invested hundreds of millions of dollars back in 2017 and 2018 when the cannabis sector was booming and paid top dollar to highly overvalued cannabis businesses.

Now Aurora is loaded to the gills with debt that look unlikely to be repaid. Skipping the gruesome details, a lot of this debt is coming due in the next few years and it looks highly questionable that Aurora will be able to pay it back.

This debt is the reason that Aurora bonds are trading at a sharp discount to face value – the bond market is saying its unlikely Aurora will be able to pay back loans under current market conditions. This is a huge problem for shares because if Aurora needs to raise more capital, current shareholders could be heavily diluted or even wiped out.

3 – Aurora Just Executed a Reverse Stock Split

Aurora just executed a doomsday move for shareholders in order to stay afloat and avoid being delisted – a reverse stock split. Here’s what Investopedia says about a reverse stock split.

  • reduces the number of shares held by each shareholder but with proportionally more valuable shares.
  • does not directly impact a company’s value.
  • often signals a company in distress since it raises the value of otherwise low-priced shares.
  • The desire to increase share prices to remain relevant and to avoid being delisted are the most common reasons for corporations to pursue this strategy.

The reverse stock split was a big signal to investors that things are not well at Aurora.

Aurora Shares Have Been Crushed

Aurora shares have been crushed in the last 12 months, falling 93% from the 52-week high.

Looking forward, I expect more losses. I don’t see a quick path to grow revenue, and I think Aurora will need to secure more funding that could wipe out current shareholders.

The Big Picture on Aurora Cannabis

Aurora has fallen on hard times and shares are down 93% in the last 12 months. This looks like a cannabis stock to avoid while the company looks for additional funding.

About the Author

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.