Please ensure Javascript is enabled for purposes of website accessibility

Is Aurora Cannabis Stock a Buy?

By David Jagielski - Apr 21, 2020 at 5:07AM

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 is down more than 90% in the past year.

Many cannabis stocks are trading for a fraction of the prices they commanded just a year ago. One of the most surprising crashes over the past 12 months has certainly been Aurora Cannabis (ACB -4.62%). As bad as the benchmark Horizons Marijuana Life Sciences ETF (HMLSF 0.00%) has been, cratering by about 70% over the past year, Aurora's done even worse -- it's lost 92% of its value.

A lot has gone wrong for Aurora during that time, but if the company can turn things around, it's not inconceivable that the stock could double, triple, or even quadruple in price. That said, a turnaround is a lot easier said than done at this point. Let's take a look at whether the stock is a buy today, and if not, what needs to happen before investors should consider taking a chance on Aurora.

Concerns about cash are high

Undoubtedly the largest challenge facing Aurora and other pot stocks today is liquidity. In February, cannabis investment bank Ello Capital projected that Aurora had just 2.3 months' worth of liquidity left, among the worst in the sector. That was even before the coronavirus officially reached pandemic status and started wreaking havoc all over the world.

It's still too early to tell the effect that the pandemic will have on the industry, but it's certainly an added risk that could make cash even more scarce -- people who've suffered job losses will inevitably cut back on their expenses, including cannabis. And there have already been warning signs about a lack of cash flow at Aurora. On Feb. 6, a week before the company released its second-quarter results, Aurora announced it had eliminated nearly 500 full-time positions. A few months earlier, in November, Aurora also said that it was halting construction on two facilities in order to save cash -- Aurora Sun in Alberta, Canada, and Aurora Nordic 2 in Denmark.

Cannabis leaf over top of a map of Canada.

Image source: Getty Images.

These are not the choices of a company in a strong financial position, and there's little reason to expect things will get any better, especially given recent results.

Growth's been virtually nonexistent

In its Q2 results, Aurora saw minimal revenue growth from the previous year. Net revenue totaling 56 million Canadian dollars was up a modest 3.4% from the prior-year quarter's CA$54.2 million. But compared with the first quarter, when net revenue was CA$75.2 million, the Q2 results show a quarter-over-quarter decline of 25.5%. The company also stated that it expects "modest to no growth" in its third quarter.

These are troubling numbers and projections for growth investors. And without a dividend or strong profits and fundamentals, there's really not much else the stock can offer. Some investors may be tempted to buy the stock for where it may be five years from now, but given the company's current cash issues, any progress will be an uphill battle.

There's no reason to invest in Aurora, at least not today

Things have gotten so bad for Aurora that earlier this month the company announced it will be doing a reverse stock split, in which shareholders will be given one share for every 12 they currently own. It's a way to get the stock price back above the $1 threshold, necessary because it was in danger of getting delisted from the NYSE if it didn't recover on its own.

But the reverse split doesn't fix any actual issues with the business; in fact, it just signifies how badly shares of Aurora have fallen. It could even make the stock a target for short sellers who see an opportunity for the price to fall even further. That's why investors who buy shares of the company today are taking on enormous risk, as there's no guarantee that Aurora's stock has hit a bottom.

For Aurora to be a buy, the company would have to show some significant progress in its financials. Not only should investors look for some double-digit growth, but the pot producer should also be generating positive cash flow from its operations, something it isn't doing today.

And to ensure any positive results are more than just an anomaly, investors should wait until the company demonstrates progress over at least two quarters. By settling for anything less, investors could be setting themselves and their portfolios up for some pain. With many other pot stocks out there, there's simply no reason to buy one as problematic as Aurora today.

David Jagielski 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
ACB
$1.65 (-4.62%) $0.08
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
HMLSF
$5.00 (0.00%) $0.00

*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
394%
 
S&P 500 Returns
127%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

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.