"Nobody loves you when you're down and out."
Aurora Cannabis (NYSE:ACB) is finding out just how true the line from the old blues song is. The stock sank last week after it whiffed on fourth-quarter revenue guidance that it had provided less than a month earlier. Now the big Canadian cannabis producer is feeling the sting from a top analyst piling on.
Stifel Nicolaus analyst Andrew Carter downgraded Aurora stock from a hold to a sell rating earlier this week, and slashed his one-year price target by more than 30%. Is it time for investors to hit the panic button with Aurora?
Behind Stifel's stifling
Stifel Nicolaus pretty much doesn't like anything about Aurora's near-term prospects. It lowered its full-year fiscal 2020 sales projection for Aurora from 600 million Canadian dollars to CA$485 million -- a 19% reduction. This likely stemmed at least in part to Aurora's chief corporate officer, Cam Battley, stating in Aurora's Q4 conference call that the company is "anticipating a bit of a plateau" in adult-use recreational cannabis sales between now and the launch of the "Cannabis 2.0" cannabis derivatives market in Canada.
Aurora's pathway to profitability also appears likely to be full of potholes, according to Stifel Nicolaus. Stifel's Carter predicted that the cannabis producer won't achieve break-even earnings before interest, taxes, depreciation, and amortization (EBITDA) until the first quarter of fiscal 2021.
Battley claimed earlier this year that Aurora would post positive adjusted EBITDA in its fiscal 2019 fourth quarter. After that didn't happen, the company's CFO, Glen Ibbott, said that Aurora is "moving to EBITDA positive in the short term, not the long term."
But Stifel now has a more negative short-term view. It thinks that Aurora will post negative EBITDA of CA$89 million in fiscal year 2020, lower than the previous estimate of an EBITDA loss of CA$32 million.
The biggest problem
In my view, the biggest problem identified by Stifel Nicolaus is one that Bank of America Merrill Lynch analyst Christopher Carey raised a couple of months ago: Aurora is running out of cash. And the failure to achieve positive EBITDA is accelerating the timeline for when the company will need to raise more capital.
Stifel expects that Aurora will burn through nearly all of its cash over the next three quarters. Before it runs out of cash, the cannabis producer will have to go to the well again. Andrew Carter thinks that will happen before the end of March 2020.
This time around, that could be more challenging than in the past. Carter wrote to investors about "the backdrop of overwhelmingly negative investor sentiment toward the [cannabis] sector, damaged credibility, and limited catalysts near-term to drive enthusiasm for the shares." This kind of environment is problematic for a company trying to raise capital by issuing new shares.
An uphill climb to generate more cash couldn't come at a worse time. Aurora is already behind some of its peers, particularly Canopy Growth, in jumping into the U.S. hemp market. Aurora Executive Chairman Michael Singer said in the Q4 call that entering the U.S. is "now a key objective" in fiscal 2020. But making that leap will require more money.
Time to panic?
There's an awful lot of doom and gloom for investors to digest related to Aurora. Is it time to panic? Not for long-term investors.
If you think that the global cannabis market is going to be anywhere close to what even conservative analysts predict it will be, Aurora has a good shot at being a huge winner over the long run. The company has the production capacity and international operations to be successful.
On the other hand, if you're not a long-term investor, any time is a time to panic. The short-term volatility associated with investing in marijuana stocks can be downright terrifying.
But the question about panicking over Aurora assumes you already own shares. Whether or not to buy Aurora right now is another matter altogether. The company will have to raise more money. Doing so will require more dilution -- either now or in the future.
I suspect things could become darker before there's light, especially if the plateau predicted by Cam Battley is reflected in Aurora's next quarterly update. Aurora could keep on singing the blues for a while.