Please ensure Javascript is enabled for purposes of website accessibility

Why Is Everyone Talking About Aurora Cannabis?

By Prosper Junior Bakiny - May 23, 2020 at 6:00AM

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

Is the pot company ready to stage a comeback?

The COVID-19 pandemic has been wreaking havoc on the economy for the better part of three months. As a result, many investors are increasingly looking for stability in a volatile stock market. And since most cannabis companies aren't consistently profitable -- and typically don't have anything resembling a timeline for when they will become profitable -- investors have been selling off shares of these businesses. Year to date, the Horizons Marijuana Life Sciences ETF (HMLSF -0.64%) -- a benchmark for the cannabis industry -- is down by almost 20%, while the S&P 500 is only down by 8%. 

One cannabis company that has been making a lot of noise over the past couple of weeks or so is none other than Aurora Cannabis (ACB 8.70%). And with a series of headlines about this highly popular pot grower sending its stock on a bit of a roller-coaster ride, it is worth revisiting what has been going on with Aurora Cannabis lately.

Cannabis leaf in a circle on a background of a map of Canada.

Image Source: Getty Images.

Aurora Cannabis conducts a reverse stock split 

Aurora posted a string of poor financial performances last year and earlier in 2020. Also, industrywide problems have been dragging down shares of cannabis companies since last year. As a result of these headwinds, Aurora's stock fell below $1 a share, and the company was at risk of being delisted from the New York Stock Exchange. The pot grower decided to take drastic action and conducted a reverse stock split earlier this month, thus decreasing its number of shares and increasing its stock price.

Each of Aurora's shareholders received one share for every 12 owned. Investors didn't seem particularly thrilled with this news, sending the stock down by about 8%. Still, that seems better than the prospect of being delisted from the New York Stock Exchange. At least this way, Aurora lives to fight another day. 

Aurora Cannabis's third-quarter financial results

When Aurora released its financial results for the third quarter of its fiscal 2020 after the market closed May 14, it surprised many investors and analysts by sharing data that was at least somewhat encouraging. Here are a few key figures to consider from Aurora's latest earnings report:

  • Aurora sold 12,729 kilograms of cannabis during its third quarter, a 34% increase compared with the second quarter.
  • The company's total net revenue for the quarter was 75.5 million Canadian dollars, representing a 35% sequential increase. 
  • Aurora's adjusted loss before taxes, expenses, depreciation, and amortization was CA$50.9 million for the third quarter, compared with CAD$80.2 million during the second quarter -- a 37% improvement.

Aurora's shares skyrocketed on the heels of its third-quarter earnings release. But before rushing to buy shares of the pot company, it is important to acknowledge that some serious problems persist with Aurora Cannabis. Let's briefly discuss just two of them.

First, Aurora continues to lose money rapidly. The company's net loss during the third quarter was CA$137.4 million. Also, Aurora's loss from operations was CA$83.6 million. And operating expenses remain high (about CA$111 million during the third quarter), which is something investors should watch, especially given this challenging economic environment.

Second, Aurora's balance sheet is still not pretty. At the end of its third quarter, the company had about CA$2.4 billion in goodwill. This much goodwill on the company's balance sheet may lead to writedowns, which may, in turn, affect Aurora's already negative bottom line. 

Aurora Cannabis remains too risky

Aurora's latest quarterly update was a step in the right direction, but it was just one step. The company has a long way to go before it becomes an attractive investment. In particular, Aurora will have to face its balance-sheet issues (goodwill and others), as well as significantly reducing its operating expenses. And while the cannabis company has a goal to become profitable on the basis of its earnings before interest, taxes, depreciation, and amortization (EBITDA) by the first quarter of its fiscal year 2021, that's not the same as turning in a net profit. In short, it may be worth keeping an eye on Aurora at the moment, but it's still not a good time to pull the trigger. 

Prosper Junior Bakiny owns shares of Aurora Cannabis Inc. 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
$1.75 (8.70%) $0.14
Horizons Marijuana Life Sciences Index ETF Stock Quote
Horizons Marijuana Life Sciences Index ETF
$5.65 (-0.64%) $0.04

*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 08/14/2022.

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.