Please ensure Javascript is enabled for purposes of website accessibility

5 Very Good Reasons Not to Buy Aurora Cannabis

By Sean Williams - Apr 13, 2020 at 7:51AM

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

Just because a stock is popular, that doesn't mean it'll make you money.

It's incredible what a difference a year can make.

At this time last year, expectations for the marijuana industry were (pardon the pun) high. Canada had somewhat recently launched recreational weed sales, and our northerly neighbor was preparing for the launch of high-margin derivatives, such as edibles, vapes, and infused beverages. Meanwhile, numerous U.S. states looked to be on the verge of legalizing recreational pot.

An up-close view of a flowering cannabis plant.

Image source: Getty Images.

Then the rug was pulled out from beneath pot stocks. Over the trailing 12 months, there's probably not a collectively worse-performing group of stocks than cannabis. Everything from supply issues to a resilient black market has stymied marijuana stock growth over the past year, and previously bloated valuations have come crashing back to Earth.

One such stock that's taken it on the chin is Aurora Cannabis (ACB -3.01%). Aurora just so happens to be the most widely held stock on millennial-focused investment app Robinhood. But as investors have discovered, popularity and profitability don't necessarily go hand in hand. Since mid-March 2019, Aurora's share price has declined by about 91%.

For some marijuana stock investors, this decline in Aurora Cannabis looks to be the perfect buying opportunity. After all, this was a company that, just nine months ago, was projected to lead the world in legal cannabis production and had access to more overseas countries than any other licensed producer in Canada. But here are five very good reasons why investors should keep their distance and not buy Aurora Cannabis.

A cannabis leaf laid atop a neat stack of one hundred dollar bills.

Image source: Getty Images.

1. No immediate path to profitability

To begin with, Aurora Cannabis is still a long way off from officially generating a recurring profit. And profits are more in focus now, given the coronavirus disease 2019 (COVID-19) crash, than in recent memory.

With supply bottlenecked in Ontario due to an inadequate number of dispensaries being opened since October 2018, Aurora Cannabis' management team has chosen to focus on pushing toward profitability by slashing costs. Within the past six months, the company has halted construction on two of its largest cultivation farms (Aurora Sun in Alberta and Aurora Nordic 2 in Denmark), announced that it would put the 1-million-square-foot Exeter greenhouse up for sale, and cut 500 jobs. While cost-cutting was likely a necessity given the willy nilly expansion of the Canadian pot industry, growth by cost-cutting can only take Aurora Cannabis so far.

Based on Wall Street's current estimates, don't expect Aurora to be profitable on a recurring basis until at least fiscal 2022.

A visibly frustrated man with his hands in the air who's looking at an open laptop.

Image source: Getty Images.

2. Ongoing share-based dilution

From tiny cannabis companies to the most popular pot stocks, financing is a big problem right now – even for a well-known name like Aurora Cannabis. Despite marijuana being legal in Canada, no bank that can read a balance sheet or income statement is going to give Aurora a large loan. Thus, the company's only means of consistently raising cash over the years has been to sell its common stock.

Though selling its common stock has been effective, it's absolutely destroyed shareholder value. Between June 2014 and December 2019, Aurora's outstanding share count has risen from approximately 16 million to 1.17 billion!

Making matters worse, the company's management discussion and analysis, posted following the end of its fiscal second quarter, showed $156.3 million Canadian in cash and cash equivalents, CA$26.1 million in marketable securities, and CA$373.6 million in short-term liabilities. In layman's terms, the company's expected costs for calendar year 2020 broadly outweigh its available cash.

An accountant chewing on a pencil while closely examining figures from his printing calculator.

Image source: Getty Images.

3. A high probability of a writedown

Speaking of ugly balance sheets, Aurora Cannabis gets my nod for worst in class.

Aside from an expected cash shortfall, Aurora has also built up quite the mountain of goodwill – i.e., the premium paid above and beyond tangible assets when making an acquisition. Since August 2016, it acquired more than a dozen businesses, practically all of which were grossly overvalued in hindsight. Even after taking a CA$762 million writedown during the fiscal second quarter, Aurora is still left with CA$2.41 billion in goodwill on its balance sheet. That's roughly twice its current market cap, and it still represents 52% of total assets.

What's more, the writedown Aurora took in Q2 2020 was primarily reflective of its overseas assets in South America and Denmark. To me this is maddening, because the company's most overvalued acquisition of all was its CA$2.64 billion purchase of Canadian licensed producer MedReleaf. With Exeter now up for sale, all Aurora ever received for its CA$2.64 billion purchase is 35,000 kilos of annual cannabis output and a handful of MedReleaf pot brands. In short, big writedowns still await.

A smoldering cannabis bud that's beginning to turn black.

Image source: Getty Images.

4. It's "stuck" with idled assets

Fourthly, investors can't overlook the fact that cost-cutting is going to leave Aurora Cannabis with a lot of nonproducing assets.

Don't get me wrong – I do believe the best course of action for Aurora Cannabis is to lay off workers and idle production given that domestic retail channels aren't yet prepared to handle the type of output Aurora is capable of. But there's no denying that going from more than 650,000 kilos in peak projected annual output to less than 250,000 kilos of run-rate annual output (based on what's currently operational) is going to sting.

Another problem here is that there's no readily available way to sell these assets if Aurora needs cash. Given the persistent problems Canada's pot industry has faced, and the lack of traditional financing options available, Aurora is basically stuck with a number of nonperforming or underperforming assets.

The facade of the New York Stock Exchange draped in a large American flag, with the Wall St street sign in the foreground.

Image source: Getty Images.

5. Delisting may be imminent

As the icing on the cake, Aurora Cannabis has spent much of the past month trading below $1 a share. Even with the stock market bouncing decisively off of its lows, Aurora Cannabis' stock has hardly budged.

In order for public companies to remain listed on the New York Stock Exchange, they need to maintain a minimum share price of $1. The good news is that Aurora could appeal a delisting notice, should it receive one, and hope its share price rebounds to north of $1 on a consistent basis. But given its mammoth number of outstanding shares, the company already has an arguably bloated market cap of nearly $1 billion at less than $1 per share.

With the possibility of delisting on the horizon, investors have more than enough reasons to steer clear of Aurora Cannabis.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.61 (-3.01%) $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 analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

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.