Over the past six months, Aurora Cannabis (ACB -4.78%) has been the worst-performing Canadian pot stock among the top five licensed producers. In fact, the company's shares have lost nearly half of their value over this period.

Should cannabis investors take advantage of this weakness to build a position, or is it best to stick to the safety of the sidelines with this falling knife? Let's consider Aurora's positives and negatives to find out.

An indoor marijuana grow room.

Image Source: Getty Images.


Wall Street's consensus estimate has Aurora's net revenue rising by a stately 73% over the next 12 months. This anticipated jump in revenue reflects the growing optimism that the retail store bottleneck will get resolved fairly soon, as well as the sizable commercial opportunity offered by Cannabis 2.0. Aurora, for its part, previously announced that it will offer vapes, concentrates, gummies, chocolates, mints, and cookies during the early innings of Cannabis 2.0. As these derivative cannabis products sport markedly higher gross profit margins than traditional dried flowers, Aurora's top line does indeed appear set for a noteworthy bump over the course of the next fiscal year.

Aurora's rosy revenue forecast is important for two key reasons. First off, this expected jump in annual net revenue should significantly reduce the company's rather alarming cash burn rate -- a seminal issue that has slowly morphed into an existential threat for Aurora. Secondly, it would also dramatically improve Aurora's valuation metrics (assuming Aurora's market cap stays relatively the same over the next 12 months). At current levels, Aurora's shares are trading at an astronomical 9.92 price-to-sales ratio, which is roughly three times the prevailing average for a consumer packaged goods company. What's important to understand is that a more typical valuation would almost certainly lower Aurora's attractiveness as a top short-selling target. That's a big deal because Aurora's shares have been one of the most shorted pot stocks in the industry over the past 12 months.


Aurora has two major risk factors right now. First and foremost, Wall Street is deeply concerned about the company's looming cash crunch. Aurora's inability to turn a profit, costly empire-building strategy, and boatload of outstanding debt could spell disaster for the company and its shareholders in the not-so-distant future. And this key risk factor is heightened by the fact that Aurora's share price currently stands at a mere $1.99. Stated bluntly, the company probably can't tap the public markets to get out of this financial jam -- at least not without running the risk of having to execute a reverse split to stay listed on the New York Stock Exchange.

Secondly, Aurora appears ripe for a managerial overhaul. In fact, some analysts have already begun calling for CEO Terry Booth to be replaced. Keeping with this theme, Booth has been unable to bring a Fortune 500 partner into the picture during his tenure, or attract large institutional investors akin to the deal Aphria struck last week. Moreover, the company has repeatedly whiffed on financial targets on his watch. Aurora has thus had to rely heavily on stock offerings to fund operations, much to the chagrin of loyal shareholders.

The risk here is that a change in leadership inherently comes with an element of the unknown. While the right executive could be exactly what the doctor ordered for Aurora, there's also the very real risk that the company won't be able to attract the type of high-level talent necessary to fill this key leadership position. Underscoring this point, Aurora doesn't have a lengthy operating history or a proven business model. Right now Aurora is an unprofitable company with a highly uncertain outlook. That's not exactly an uber-attractive setup for a top executive.

Is Aurora worth the risk?

This year could make or break Aurora. The company is perhaps six months away from realizing a healthy increase in sales, which could make it a profitable entity from that point forward. To get to that next phase of its life cycle, however, Aurora's brain trust has to figure out how to handle a possible cash crunch without wiping out current shareholders with seemingly endless stock offerings. As such, it might be best to pass on this high-profile cannabis stock until the company has clearly hit an inflection point.