Enthusiasm for marijuana stocks is at an all-time high, and that buzz has enabled Aurora Cannabis (ACB 1.31%) to expand operations at a mind-bending pace. As a result, the marijuana producer has a large share of the Canadian market for legal cannabis, rapidly expanding international operations, and a billionaire activist investor on the payroll.
Aurora Cannabis will soon be able to grow 700,000 kilograms of marijuana annually at a per-gram price that its big-name competitors can't match. Hiring billionaire-activist Nelson Peltz as a senior advisor could inspire Coca-Cola to return to the deal table or another fortune 500 company to take a chance.
What's great about Aurora now
Peltz has a lot of experience as a director of international companies with operations that span the globe, and Aurora's eager to convince at least one of them to take a large stake in the company. You may remember, Canopy Growth received $4.2 billion from Constellation Brands in return for 38% of Canopy's shares. More recently, Altria scooped up 45% of Cronos Group for $1.8 billion.
Aurora's eponymous brand of medical-cannabis products are relatively popular in Canada, thanks to the right combination of low pricing and fairly consistent quality. Recently, Aurora acquired Whistler Medical, which gives the company a high-margin luxury brand that's well-loved by a smaller number of patients who can afford it.
Aurora can produce half a million kilograms of cannabis per year, and production could exceed 700,000 kgs in 2020. Aurora's fancy automated greenhouses have lower labor costs than most of its peers, which could give the company a long-term advantage in a market that's getting crowded.
How Peltz could make Aurora even better
If Nelson Peltz were in control of Aurora's Board of Directors, there's one overarching change he would probably make -- and that's to end a growth-at-any-cost strategy that's created an endless string of investments made with money the company doesn't have. Whistler Medical was probably a wise addition, but spending heavily to build operations in 24 countries across five continents in a few short years probably won't work out for long-term investors dipping their toes into Aurora right now.
Although the stock has soared 1,940% over the past three years, its market cap has risen 15,840% over the same time frame to a whopping $9.07 billion. Producing a similar return from recent prices would require the company's market cap to reach at least $175 billion in a few short years, which would make Aurora around twice as valuable as General Electric is today.
Aurora finished 2018 with $205 million in cash and securities, which means another capital raise is right around the corner unless demand for legal cannabis skyrockets in the first quarter while prices either stay level or improve.
Why Peltz won't get his way
A Rolodex full of potential new partners and an air of dignity are the key reasons Aurora's willing to pay Peltz up to 620 million Canadian dollars for advisory services. So far, though, the activist and the fund he manages haven't disclosed any investment in Aurora Cannabis beyond Peltz's time and reputation.
Activist investors all follow the same basic formula that involves buying stocks that are underperforming and trying to raise them in ways their associated management teams don't agree with. Without any shares to vote, Peltz isn't going to stop Aurora from making extremely risky investments.
Aurora's taken what looks like a strong position in new markets trying to get their government-run medical-marijuana programs off the ground. While Germany tends to pay a much higher cost per gram, it's also the strictest EU member when it comes to cannabis. Prosecutors generally can't charge anyone with possession of less than 7.5 grams, and anyone can grow it for personal use, as well. In Spain, you're allowed to grow cannabis on private property as long as it's to be consumed by adults in private, which has given rise to dozens of non-profit Cannabis Social Clubs that function as marijuana shops.
Stock-market enthusiasm knows no bounds, but the odds of Aurora getting big enough to provide outstanding gains from its current starting point are slim. Sales, general, and administrative costs reached CA$66.3 million during the last three months of 2018; during that time, the company reported a gross profit of just CA$32 million. With Social Clubs and their counterparts throughout the EU operating with less concern than Canada's illicit market, it's going to be hard to maintain wide profit margins on medical marijuana in the region.
During the last three months of 2018, Aurora reported a net loss of CA$240 million and a comprehensive loss of CA$405 million once you account for fluctuating prices of other marijuana stocks that it owns. In Aurora's domestic market, cannabis prices are contracting and Aurora can only trim so much from cost of sales per gram that reached CA$2.60 during the last three months of 2018. That means investors can expect further losses ahead.