Marijuana stocks are a highly polarizing investment opportunity. Whereas most of Wall Street believes that the cannabis industry will see global sales soar to between $50 billion and $200 billion a year by 2030, it's an industry that has a lot of maturing to do between now and then. And from what we know, at least historically, from next big thing investments, not every company can be a winner.
But don't tell that to the investors of Aurora Cannabis (NYSE:ACB), which offer unwavering support to the company. On millennial-focused investment app Robinhood, nearly twice as many investors own Aurora Cannabis as the second most-held stock on the entire app. Think about that for a moment -- there are thousands of stocks for investors to choose from, and Aurora Cannabis is the most popular stock in the Robinhood universe, by a mile!
Investors simply can't get enough of Aurora Cannabis
Why? Well, for one, Aurora Cannabis is liable to the world's leading marijuana producer. The company has 15 production facilities around the world (most are in Canada), with peak production potential of perhaps 700,000 kilos per year. As the prospective leading grower, Aurora should have no trouble securing lucrative supply deals, or utilizing economies of scale to substantially lower its per-gram production costs.
Aurora Cannabis also happens to have a broader international presence than any other pot stock. Including Canada, it has cultivation, research, export, or partnerships in place in 25 countries. For added context, just two other Canadian growers (Canopy Growth and Tilray) have a presence in more than a dozen total countries. These foreign countries are particularly important because they represent external sales opportunities if and when Canadian dried flower becomes oversupplied and commoditized.
Additionally, Aurora Cannabis landed billionaire activist investor Nelson Peltz as a strategic advisor in mid-March. Peltz has focused a lot of his attention on food and beverage companies throughout his investment career, making him the perfect bridge to help Aurora Cannabis secure a potential partnership in the upcoming year.
As one last note, Wall Street's consensus price target on Aurora implies up to 61% upside, and retail investors tend to place a lot of faith in the prognostications of Wall Street firms.
It has what look to be the hallmarks of an interesting high-growth investment. Unfortunately, investors' obsession with Aurora is misplaced for a variety of reasons.
Here's why so many investors are wrong about Aurora
To start off with, Aurora Cannabis isn't necessarily in better shape than its peers when it comes to the persistent supply issues that have been adversely impacting the Canadian market. The combination of Health Canada being unable to approve cultivation, processing, and sales license applications in a timely manner, coupled with Ontario's slow-stepped rollout of physical dispensaries, has allowed the black market to thrive in our neighbor to the north. While Ontario has plans to allow additional dispensaries to open, and Health Canada has made changes to the cultivation application process in an effort to shrink its queue, these are issues that will take many quarters, if not well into 2021, to resolve.
To build on this point, I'd contend that size is actually working against Aurora Cannabis as these supply issues persist. Having 15 separate production facilities could actually make it more difficult for Aurora to realign its output to match demand. The company recently announced that it would be idling construction at its flagship Aurora Sun campus in Alberta (with the exception of six grow rooms), as well as Aurora Nordic 2 in Denmark. Putting most of this production on hold effectively halves Aurora's forecasted run-rate output by the end of fiscal 2020 (June 30, 2020). And make no mistake about it, additional production cuts may become necessary.
As Aurora aims to cut expenses and adjust its output, you can almost guarantee that the company won't be profitable on a recurring operating basis. While it's impossible to predict how fair-value adjustments (an International Financial Reporting Standards accounting quirk) will impact the company's bottom line, I feel pretty confident in suggesting that Aurora is still a ways away from producing a genuine operating profit, without the assistance of one-time benefits or fair-value adjustments.
Aurora Cannabis' lack of a major equity partner has also left the company with a less-than-enviable cash position, at least when compared to a giant like Canopy Growth. To be clear, Aurora hasn't had any issues raising cash, when necessary, but the only easy access it has to capital is to sell shares of its common stock. Including the recent share issuance to cover its convertible debenture that was due in the first quarter of 2020, the company has seen its share count balloon from 16 million to around 1.1 billion in 5.5 years. Aurora is most literally drowning its shareholders, and yet investors keep piling in.
Maybe the most damning aspect of this company is how careless it's been with regard to valuing its acquisitions. Given just how many deals have been amended or cancelled of late, it's all but a certainty that Aurora overpaid for its more than one dozen acquisitions since Aug. 2016. How do we know? Just take a gander at the company's balance sheet, which has $3.17 billion in goodwill. This represents 57% of the company's total assets. Not to mention, another CA$682 million of total assets is classified as intangible assets. That's 69% of total assets built on premium and promises, which isn't going to pay the bills.
In other words, Aurora Cannabis isn't the great company it's made out to be. Its balance sheet is a mess, with a future writedown looking likely, and its size is actually a disadvantage until Canada figures out how to drive out the black market and resolve its supply issues. It may be popular with retail investors, but being popular is no guarantee of success.