Please ensure Javascript is enabled for purposes of website accessibility

Is This 1 Mistake the Reason for Aurora Cannabis' Struggles Today?

By David Jagielski - Mar 17, 2020 at 7:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The pot stock has been among the worst-performing in the industry over the past year.

Things used to look a lot better for cannabis producer Aurora Cannabis (ACB -6.49%), which was once among the industry's leaders, a key rival to Canopy Growth (CGC -5.98%). But a lot's changed even in the past year -- Aurora's stock is down by about 90% over the past 12 months. That's much worse than the Horizons Marijuana Life Sciences ETF (HMLSF -1.48%), which has fallen approximately 78% during that time. And with the free fall looking to continue, there's little reason to be optimistic about stock today, especially after last month, when management forecast "modest-to-no growth" for its next quarter.

Investors are likely wondering where it all went wrong. There's one area in which the company may have failed its investors the most: not finding a partner from another industry.

Aurora's been looking for a long time

When Aurora brought billionaire investor Nelson Peltz onto its team a year ago, shareholders were expecting some deals to take place. Even just one large partnership may have sufficed. However, nothing notable has occurred since his appointment as the company's strategic advisor.

It's clear that strategic partnerships were a key goal for Peltz's appointment, and a year out, it's disappointing that nothing's materialized. While no deal can sometimes be better than a bad deal, given the risk in the cannabis industry, a partner to help steer the company would have added a lot of value for Aurora; it could even have prevented its sizable sell-off. A big reason investors are likely a lot more bearish on the company is that it's become a very risky buy.

Man holding head and watching falling stock arrow

Image source: Getty Images.

Without a partner, Aurora's become a more dangerous investment

One of the biggest problems about Aurora not having secured a deal with a large company from another industry is that the stock is therefore a lot less stable. Rival Canopy Growth not only benefited from a big $4 billion investment from Constellation Brands (STZ 1.78%) in 2018, but it's also been able to tap into the company's experience and expertise. When a change in leadership came with the departure of Bruce Linton last year, Constellation's then-CFO, David Klein, took over.

Aurora isn't able to do the same. It too has recently undergone a management shuffle -- except Aurora remains without a CEO after the resignation of Terry Booth in February. The company's going through a search for a new leader, and it doesn't have the luxury Canopy Growth had in being able to appoint someone very familiar, like Klein.

Admittedly, that hasn't kept Canopy Growth's stock from falling. But there's also little chance that Canopy will run out of cash in the near future, and its business is not fundamentally at risk. The same, unfortunately, cannot be said of Aurora. In February, investment bank Ello Capital estimated that Aurora was in the worst situation of all the cannabis producers in Canada, with only 2.3 months of liquidity at the time.

While that doesn't mean the company is going to completely run out of money and shut down its operations in a month or two, it highlights the severity of the situation and the necessity of generating and raising more cash to keep its operations going. Management already announced in November that it was ceasing the construction of two facilities in an effort to conserve cash, and Aurora may end up needing to take even more drastic action to free up cash flow and keep the business going.

Is there any reason to invest in Aurora today?

The stock does have the potential to recover over the long term, especially if it can clean up its house, bring down its costs, and get back to growing its business again. The problem for Aurora today is time. In its most recent quarterly results, the company reported cash and cash equivalents totaling 156 million Canadian dollars. That's a concern when, over the past six months, Aurora's burned through CA$230 million in cash just from its day-to-day operating activities.

The pot stock is in the midst of a dangerous decline, and unless there's a significant development that changes that trajectory, there's no reason for investors to consider buying shares of Aurora today. Insolvency poses too significant a risk.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
STZ
$238.67 (1.78%) $4.17
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$2.74 (-6.49%) $0.19
Canopy Growth Stock Quote
Canopy Growth
CGC
$5.19 (-5.98%) $0.33
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$3.34 (-1.48%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.