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Here's Why Aurora Cannabis Doesn't Deserve a Top-Shelf Valuation

By George Budwell – Sep 16, 2019 at 5:35PM

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A bet on this Canadian marijuana company is a bet on the political future of the country south of its home market.

Aurora Cannabis (ACB 0.82%) is one of the most popular marijuana stocks among retail investors. The good news is that a solid rationale does exist for its rock star-like popularity. Aurora has positioned itself to become the top dog in its home market of Canada in terms of annual sales. The company has also established a top-tier international footprint and a wide-ranging product portfolio to capitalize on the next-stage of marijuana legalization in Canada.

Nonetheless, Aurora's stock sports a rather questionable valuation. Depending on which analyst estimate you go by, Aurora's shares are currently trading at 8 to 13.5 times the company's projected sales for fiscal year 2021. That's a sky-high valuation anyway you slice it, and unfortunately, Aurora probably doesn't deserve one.

The top view of a flowering cannabis plant.

Image Source: Getty Images.

Too much uncertainty and risk

Aurora's premium valuation seems to be predicated upon the rather shaky proposition that the next U.S. political cycle will usher in game-changing marijuana legislation. Not so fast. The cold, hard truth is that the only U.S. presidential candidates that are clearly gung ho about rescheduling marijuana are  left-leaning Democrat candidates -- all of whom currently trail in the polls.

Underscoring this point, former Vice President Joe Biden -- and current Democrat presidential front runner -- has been flat-out unwilling to embrace marijuana legalization as part of his platform -- despite several nationwide polls showing that a majority of Americans do, in fact, support such legislation. Biden's lack of enthusiasm on this touchstone issue definitely qualifies as a dark cloud for the industry.

On the other side of the political divide, President Trump has shown little to no interest in the subject during his tenure in the White House. Federal marijuana legalization, therefore, will probably remain on the back burner if Trump is reelected in 2020 -- especially if Republicans retain control of the Senate. In effect, marijuana investors shouldn't expect a shift in federal policy unless there is a dramatic change of power in Washington, D.C., in 2020, which doesn't appear to be likely right now.

 

Key investing takeaway

The bottom line is that Aurora -- along with its Canadian cannabis peers -- may have to wait perhaps another eight to 12 years for the U.S. recreational cannabis market to truly come into play. That might sound like a black-swan type scenario, but it also happens to be the most realistic forecast based on the U.S. political landscape. 

Think about it another way. When the Affordable Care Act (aka "Obamacare") became law almost a decade ago, numerous political pundits and healthcare analysts thought this groundbreaking legislation would prove to be a stepping-stone to universal healthcare. As things stand now, though, Obamacare is  arguably on life support from a political standpoint. The push to end federal prohibition on marijuana -- despite its numerous successes over the past five years -- could ultimately suffer the same fate as the drive toward universal healthcare in the United States.

The key takeaway here is that it might be best to avoid Aurora's stock for the time being. The company definitely has a lot of potential, but there's no telling if or when the U.S. recreational cannabis market will fully open up to international players. If anything, the old guard in both political parties seems content to kick the can down the road on this issue, which doesn't bode well for legal marijuana companies with premium valuations. 

 

George Budwell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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