If there's one thing that millennials absolutely love, it's cannabis stocks. Earlier this year, online investing app Robinhood told Investor's Business Daily that four of the 14 most-held stocks on its platform were pot stocks. In fact, Aurora Cannabis (ACB 1.28%) was the single most-held stock of any publicly traded security on Robinhood, surpassing the likes of Apple and Amazon.com.
Aurora's popularity is derived from a number of factors. It is the clear leader in peak production potential; has a production, export, research, or partnership presence in more countries worldwide than any other marijuana stock; and has billionaire activist investor Nelson Peltz, who has a keen understanding of food and beverage companies, working as a strategic advisor.
And yet, Aurora has been creamed in 2019. The company's stock is down nearly 50% on a year-to-date basis, as of this past weekend, and we have to go all the way back to October 2017 to find the last time Aurora traded in the $2's.
Some folks would call this a once-in-a-lifetime buying opportunity. I'd call it a trap. Here are five reasons Aurora still isn't worth buying.
1. Canada's supply issues won't be fixed for a while
Although it's a well-known fact that the stock market tends to bottom well before the worst news hits the wires, the worst news for Canada's marijuana industry could still be many quarters down the road.
You see, Aurora and its peers have been clobbered by regulatory and procedural delays. Health Canada, the agency tasked with overseeing the legal weed industry to our north, began the year with over 800 license applications to review. Even with midyear changes designed to minimize the number of cultivation license applicants, it's still going to be some time before Health Canada is able to work through this backlog of applications. Let's remember that Aphria only weeks ago received approval to plant at its Aphria Diamond joint venture. It "only" took between 18 and 21 months for the company to gain approval following the filing of its application with Health Canada.
The other issue here is at the provincial level, where certain provinces (ahem, Ontario) have done a very poor job of providing a platform for legal marijuana to be sold. Despite being home to nearly 40% of all Canadians, Ontario has a measly two dozen cannabis retail locations open for business. Though a new retail license lottery is set to triple these figures, it's still nowhere near enough to combat the black market.
2. The company's international investments won't pay dividends for years
There's no doubt that Aurora's international presence is one of the biggest draws to this stock. Unfortunately, it's going to be years before these pretty sizable overseas investments begin to meaningfully add to sales and the company's bottom line.
The reason? It's long been the expectation of Health Canada that domestic producers would ensure that demand was being met at home first before exporting their product to overseas markets. But, as noted, it's going to be some time before this domestic demand is anywhere close to being met. Sure, there's oversupply now, but that's only because there are nowhere near enough channels in which to sell legal cannabis. It'll probably be well over a year from now before an adequate number of retail locations are open throughout Canada.
Furthermore, a number of overseas markets are still in the process of establishing laws to govern their pot industries. In Mexico, for example, a recreational legalization bill that's being discussed would keep big businesses (especially foreign companies) from being prioritized for licenses. That's a blow to Aurora, given that it owns pharmaceutical distributor Farmacias Magistrales.
As one last addendum, Aurora also noted in its fiscal first-quarter report that it'd be halting construction at Aurora Nordic 2 in Denmark to conserve capital in the interim. Aurora Nordic 2 accounts for about 90% of the company's forecasted peak European output.
3. Aurora keeps diluting the daylights out of its shareholders
Whereas Canopy Growth and Cronos Group were lucky enough to land major equity investments, and thus have plenty of cash to lean on to execute on their long-term strategies, that's not the case for Aurora Cannabis.
Aurora has chosen to grow organically and through acquisitions. But since the company isn't rolling in the green, it's financed practically all of its buyouts by issuing its own common stock as collateral. And in the instances where the company does need cash, Aurora leans on common stock issuances or convertible debentures (in rarer instances) to raise capital.
Here's the problem: Issuing stock, or even convertible notes that can be exercised into common stock, dilutes existing shareholders. Over the last 21 quarters (five years and three months), Aurora's share count has risen by a little over 1 billion shares -- and the company just keeps issuing stock. With losses likely to continue through fiscal 2020, and additional expenses looming if and when the company does recommence construction at Aurora Nordic 2 and Aurora Sun, the company's cash position is less than enviable.
4. There's a good chance of a writedown
I know I've beaten the dead horse a few too many times on Aurora Cannabis' goodwill, but it bears repeating yet again given that some investors genuinely see the stock as a bargain in the $2's.
Last week, prior to the company's sizable three-day rally, Aurora Cannabis hit yet another dubious mark. Namely, its goodwill of $2.4 billion was higher than its market cap of $2.38 billion. In pretty much every transaction the company has made since August 2016, at least half the value of that deal has been recognized as goodwill.
In a perfect world, Aurora would have no trouble monetizing the cultivation, processing, and intellectual property assets of the companies it's acquired, and would therefore whittle away its goodwill completely over time. But in the cannabis space, we've witnessed a shelved megamerger and a host of amended acquisitions in recent weeks. This suggests that all previously completed deals were grossly overvalued. Thus, it makes the likelihood of Aurora recouping the full value of its $2.4 billion in goodwill highly unlikely.
What's far more likely is that Aurora writes down a good chunk of its goodwill, which currently makes up 57% of total assets. If and when that happens, Aurora's stock could be clobbered.
5. There are much better values out there, fundamentally
Last but not least, there are far better values to choose from than Aurora in the U.S. and/or Canadian pot space.
For example, Aurora Cannabis is currently valued at more than seven times fiscal 2020 sales, and appears to be on track to lose more than 150 million Canadian dollars, per Wall Street's consensus. And these sales figures may not even accurately reflect the more than 320,000 kilos of peak production that the company recently decided to idle in order to save capital.
Comparatively, in Canada, there's small-cap grower OrganiGram Holdings (OGI 1.24%), which is valued at 4.6 times 2020 fiscal sales, and even after an earnings warning is expected to be profitable. Additionally, OrganiGram is the only Canadian marijuana grower that's generated a quarterly operating profit without the aid of fair-value adjustments and one-time benefits. With only one grow site in Moncton, New Brunswick, as opposed to 15 separate growing locations for Aurora, OrganiGram can more easily control its expenses and manage its supply chain to match market demands.
Aurora Cannabis may be a popular pot stock, but popularity and profitability are two distinctly different things when it comes to investing.