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Why Aurora Cannabis Stock Dropped 10% This Morning

By Rich Smith - Updated May 31, 2020 at 1:10PM

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Investors seem uncertain that a relatively big bet on CBD oil will pay off.

What happened

Canadian cannabis kingpin Aurora Cannabis (ACB -7.27%) closed its acquisition of Massachusetts-based cannabidiol (CBD) maker Reliva LLC last night in a $40 million deal (or more than twice that, if Reliva hits certain financial milestones over the next couple of years).

That sounds like good news, but investors don't seem convinced that it is good news. Aurora Cannabis stock plunged more than 10% as soon as trading resumed this morning and hasn't gained back much since -- down 8.5% as of 12:15 p.m. EDT.

Chemical diagram of cannabidiol next to a bottle and eyedropper.

Image source: Getty Images.

So what

Aurora interim CEO Michael Singer says the merger will "create a market leading international cannabinoid platform that we believe can deliver robust revenue and profitable growth." Investors, however, seem more worried about the price Aurora paid for that growth.  

At $40 million, the purchase price is about three times Reliva's $13.5 million in estimated annual sales -- which would be a bargain. (Aurora's own shares fetch 6.6 times trailing sales.) If Aurora ends up paying the extra $45 million it has agreed to, for hitting "milestones," however, the purchase price will be something closer to 6 times sales -- still a bargain relative to Aurora's own stock valuation, but much slimmer.

Now what

Also of concern: Aurora Cannabis stock has lost 84% of its value over the past 12 months. As a result, to pay the $40 million purchase price for Reliva, Aurora had to issue 2.5 million new shares, diluting its existing shareholders out of about 2.2% of their stake in the company. After the stock's continued sell-off, assuming Aurora maintains its current share price of $14 and change, paying the additional $45 million contingent fee for Reliva could cost the company another 3.2 million shares and dilute shareholders out of another 2.9%.

Granted, there's good news too: By paying for Reliva in stock rather than cash, Aurora was able to conserve its estimated $175 million in cash on hand for other uses. Also, there's the possibility that over the next couple of years, Aurora's stock price will go up and not down, reducing the number of shares it would need to issue to satisfy the $45 million contingent fee.

For now, however, investors appear to be betting on seeing Aurora's stock go down, not up.

Rich Smith 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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