The marijuana industry advanced by leaps and bounds in 2018, with our neighbor to the north becoming the first industrialized country in the world to legalize recreational marijuana, and only the second overall behind Uruguay. In doing so, the legal cannabis industry stepped out of the shadows and into the spotlight of fast-growing, legitimate business models.

With sales expected to be in the billions of dollars in Canada by the turn of the decade, pot stocks have been jockeying for growing capacity, brand-name products, and other key catalysts that'll help them stand out in this fast-paced industry. Perhaps none has been more active in making a name for itself than Aurora Cannabis (NYSE:ACB).

A jar filled with cannabis buds that's sitting atop a fanned pile of twenty-dollar bills.

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Aurora Cannabis is expanding on all fronts

When 2018 began, Aurora Cannabis had a handful of small grow farms, along with its then-flagship project, the 800,000-square-foot Aurora Sky facility that was capable of producing in excess of 100,000 kilograms per year when complete. However, when the curtain closed on 2018, Aurora was easily top of the pack in terms of peak annual production potential. Based on its existing projects, 700,000 kilograms in peak annual output seems reasonable, with as much as 1.2 million kilograms possible each year given how much adjacent owned and leased land it possesses.

Aurora Cannabis, which is currently producing at a run rate of 100,000 kilograms annually, according to its most recent quarterly update, has boosted its capacity three ways. First, it did so organically. The aforementioned Aurora Sky facility was constructed from the ground up, as is the massive 1.2-million-square-foot Aurora Sun facility in Medicine Hat, Alberta. When complete, Aurora Sun will be the largest producing location in the company's portfolio at 150,000 kilograms annually.

Second, Aurora Cannabis made sure to partner up when it found the opportunity to do so. Last year, it forged a joint venture with Alfred Pedersen & Son in Denmark to retrofit existing vegetable-growing facilities to cannabis production. With the growing facilities already built, it saves both time and money to simply retrofit them for growing weed. This project, known as Aurora Nordic, could provide 120,000 kilograms a year to the Scandinavian region.

And then there's acquisitions, which Aurora Cannabis has been quite actively pursuing. Last year, Aurora gobbled up CanniMed Therapeutics for $852 million, MedReleaf for $2.5 billion, and ICC Labs in South America for about 290 million Canadian dollars. The MedReleaf transaction lifted its annual peak capacity by 140,000 kilograms, with the ICC Labs deal providing a bounty of land that could be used for added capacity.

Two businessmen in suits shaking hands, as if in agreement.

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Aurora goes shopping yet again

Of the three methods, Aurora has been especially reliant of late on the acquisition side of the equation. Earlier this week, the company made yet another purchase, when it announced the CA$175 million buyout of privately held Whistler Medical Marijuana in Canada. Note that the CA$175 million acquisition price includes certain milestone payments as well.

Why acquire Whistler Medical Marijuana, you ask? Well, it certainly wasn't for the company's roughly 5,000 kilograms in annual growing capacity. Rather, it was for Whistler's established cannabis brand and diversified product line that has more than 30 flower varieties and an "extensive genetics bank of over 150 strains," per the press release.

As one of the first 10 licensed cultivators in Canada, Whistler Medical Marijuana has had plenty of time to build a reputation for its cannabis brands in the high-demand and tourist-friendly British Columbia. With the field beginning to get crowded (pun intended), buying Whistler Medical provides Aurora Cannabis with a well-known brand and a company that's been achieving positive cash flow since 2015.

Whistler, which has been servicing Australia and the Cayman Islands, is also expected to see its products brought into new markets. Aurora currently has a presence in 22 countries, and its management team plans to use its existing infrastructure to maximize Whistler's reach. 

On paper, this sounds like a solid deal for Aurora, as do most of its buyouts. But the unfortunate fact remains that Aurora's growth-at-any-cost strategy could cost shareholders in the interim.

A hundred-dollar bill on fire atop a lit stove burner.

Image source: Getty Images.

Here comes more dilution

What I failed to mention above is how the "up to CA$175 million" transaction would be funded. If you guessed "with more shares of Aurora's common stock," give yourself a pat on the back. Then again, if you've followed any of their deals over the past year, you'd know that this is a company that refuses to part with any of its cash and instead issues common stock like it's going out of style.

The company's CanniMed Therapeutics deal was mostly in stock, while the $2.5 billion MedReleaf purchase, the CA$290 million ICC Labs buyout, and now the CA$175 Whistler Medical acquisition will be conducted entirely in common stock.

The issue with Aurora's acquisition-hungry strategy is threefold. First, ballooning the company's outstanding share count has a tendency to weigh down the value of the shares held by existing investors. For instance, over the trailing year, Aurora's market cap has risen by 67%, reflecting the added value of its purchases. However, its share price is down by 19% over this same time frame, reflecting an underperformance of 86% caused entirely by share-based dilution.

The second problem is that a ballooning outstanding share count will weigh down Aurora's ability to generate a meaningful per-share profit. Back in fiscal 2014, Aurora had just 16 million shares outstanding. As of its fiscal first quarter of 2019, it had almost 962 million. Mind you, this didn't take into account its ICC Labs acquisition or its purchase of Whistler Medical. Tack on other share-increasing tools like convertible debentures, stock options, and warrants, and Aurora could be pushing nearly 1.1 billion shares outstanding by the turn of the decade...assuming it doesn't buy another company and make matters worse.

The third and final concern is that we've witnessed this acquisition-hungry strategy backfire recently. Understandably not comparing an apple to an orange, major 3D-printing companies gobbled up dozens of smaller providers with pie-in-the-sky sales growth expectations in the mid-2010s. However, these companies struggled to integrate so many acquisitions and lost their identity trying to meld so many businesses at once. My worry is that Aurora will also lose its identity and struggle to integrate all of these businesses it's acquiring.

In short, I consider this yet another strike against Aurora Cannabis and suggest looking elsewhere for value in the marijuana industry.

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