To say that things haven't gone cannabis investors' way over the past year would be a brutal understatement. Following a blazing hot start to 2019, which saw more than a dozen marijuana stocks increase in value by at least 70%, most have now been stuck in an 11-month (and counting) downtrend.
The finger of blame has been pointed at supply issues in Canada, with Health Canada and provincial-level regulators creating everything from shortages to bottlenecks in key regions. Blame can also be assigned to regulators in recreationally legalized states for overtaxing cannabis and slowing down the process by which retail licenses are issued. The end result was that illicit producers have thrived, even with legal-channel weed hitting the marketplace.
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One pot stock that's taken it on the chin particularly hard is Aurora Cannabis (ACB -6.81%). If you follow marijuana stocks, Aurora is a name that's impossible to escape. It's an absolute favorite of millennial investors and was, at one time, expected to lead Canada in terms of peak annual output. But since hitting its 2019 closing high of $9.96 on March 19, Aurora's stock is down 86% through March 2, 2020.
Things are probably going to get worse in the short term for Aurora Cannabis
Aurora stock is now going for a mere $1.36 per share, and some investors may think it's a bargain. After all, the company is still expected to be one of the leading producers of marijuana throughout Canada and has a presence in 24 countries outside of its home market.
But believing that a low share price is enough justification to buy into Aurora Cannabis could prove dangerous. Chances are that things are going to get worse for the company before they have a chance to get better.
On a more immediate level, investors should be worried about the company's consistently shrinking share price. Being listed on the New York Stock Exchange (NYSE) has afforded Aurora improved volume-based liquidity, increased Wall Street coverage, and undoubtedly better investor visibility than if it were trading on the over-the-counter exchange. However, the NYSE has a share price minimum of $1 that's required for continued listing. Aurora Cannabis isn't there yet, but amid the strongest point rally in the history of the Dow Jones Industrial Average, on Monday, March 2, Aurora's stock hit a new 52-week low of $1.31.
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If Aurora's shares were to dip below $1 and stay there for a period of 30 days, the company almost certainly would draw a delisting notice from the NYSE. The company would have remediation pathways available, such as delaying delisting and hoping its stock regains a $1 minimum share price. Then again, "hope" isn't a valid long-term strategy.
There's also the possibility of a reverse stock split, which would reduce the number of shares outstanding (currently 1.17 billion) and pump up the company's share price. Unfortunately, reverse stock splits are typically viewed as a sign of weakness and may lead to further downside.
The intermediate forecast and long-term outlook aren't looking too hot, either
Even if Aurora Cannabis somehow manages to skirt a delisting notice from the NYSE, its balance sheet remains an utter mess that's not conducive to growth or market share expansion.
On one hand, Aurora Cannabis ended its fiscal second quarter (ended Dec. 31, 2019) with $156.3 million Canadian in cash and CA$26.1 million in marketable securities. This might sound like a healthy capital balance but it's nowhere near sufficient given the company's own expectations of CA$373.6 million in liabilities over the next 12 months and close to CA$1.3 billion in liabilities over the next four to five years.
With pretty much all avenues to traditional funding closed off and no equity deal signed, Aurora's only means of raising capital continues to be to sell its own stock. After ballooning its outstanding share count by 1.15 billion since June 30, 2014, it's no wonder shareholders have taken it on the chin.
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I'd also suggest taking issue with the company's CA$4.67 billion in total assets. A figure like this would make it appear that Aurora's valuation is exceptionally cheap -- its market cap as of Monday, March 2, was $1.6 billion (CA$2.11 billion). But it overlooks that this company has grossly overpaid for each and every one of its more than one dozen acquisitions. Even after writing down CA$762.2 million in goodwill during the fiscal second quarter, the company is still lugging around CA$2.41 billion in goodwill and CA$503.5 million in intangible assets. Combined, goodwill and intangible assets account for a staggering 62% of total assets.
In my view, there's zero doubt that Aurora is going to have to address its acquisition of MedReleaf and write down a significant portion of the CA$2.64 billion purchase price. With the Exeter greenhouse on the sale block, this mammoth purchase will ultimately have yielded only 35,000 kilos of annual production capacity and a few unique pot brands. Entire licensed producers with 50,000 kilos of annual production capacity can currently be acquired for less than CA$100 million, making a writedown a virtual given in my book.
While I understand the psychological factor that Aurora's low share price might appear enticing, its $1.6 billion valuation is far from being a good deal. There are serious long-term financing concerns, a high probability of future writedowns, and now the very real possibility of delisting if its share price continues to fall. It remains an easily avoidable marijuana stock.
