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Why Aurora Cannabis Stock Tanked Today

By Keith Speights - May 19, 2020 at 3:06PM

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An analyst thinks that the Canadian marijuana producer's good news in Q3 might be fleeting.

What happened

Aurora Cannabis' (ACB -4.23%) sizzling momentum appears to have fizzled. Shares of the Canadian cannabis producer were tanking 12.9% as of 2:44 p.m. EDT on Tuesday. Aurora posted surprisingly strong fiscal 2021 Q3 results last week, but today's decline came after MKM Partners analyst Bill Kirk wrote to clients that the company isn't "out of the woods yet." 

So what

No psychic skills were needed to predict that Aurora's stock couldn't continue to soar as it has over the last couple of trading days. Anyone who has examined the company's financial details already knew what Kirk stated in his note to clients. Aurora's goal to generate positive adjusted EBITDA by the end of September isn't a slam dunk by any stretch of the imagination. The company could very well have to raise more capital and dilute its shares even more in the process.

Traffic light displaying a red light with a cannabis leaf

Image source: Getty Images.

Kirk correctly pointed out that Aurora could be at risk of further writedowns in goodwill. And while the company has cut back its production, it still produced more cannabis than it sold in the third quarter. Unless demand picks up significantly (a questionable proposition), Aurora could have to write down inventory as well.

There's also another likely factor at work: Aurora's huge recent jump had all the makings of a short squeeze. While the gains caused by a short squeeze can be breathtaking, the end of a short squeeze usually results in a big decline.

Now what

What's next for Aurora? Expect a lot of volatility for the marijuana stock. Any negative news could send investors heading for the hills, while any positive news could cause short-sellers to panic and buy shares to cover their positions. 

Keith Speights 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.

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