When the first quarter of 2019 came to a close, the cannabis industry looked to be unstoppable. Wall Street's sales expectations for the industry were soaring, especially with Canada having legalized recreational pot and numerous U.S. states considering medical or adult-use legalization. But these "high hopes" soon faded.

Since April 2019, only the oil and gas industry has been a larger disappointment to the investment world than marijuana stocks. Canada's sales growth has been stymied by regulatory-based supply problems, while U.S. weed companies have struggled under the weight of high taxation. Over the past 14-plus months, most pot stocks have lost anywhere from 50% to 90% of their value.

Perhaps no marijuana company has been a bigger disappointment to investors than Aurora Cannabis (ACB 12.87%).

An up-close view of a flowering cannabis plant.

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Aurora Cannabis has failed to live up to the hype

Aurora, which is a favorite among millennial investors, was widely expected to lead the world in legal weed production. At this time last year, it had 15 properties that, if fully developed and operational, could yield north of 650,000 kilos of marijuana per year.

Aurora also had a production, export, clinical research, or partnership presence in two dozen countries outside of Canada. This international presence was viewed as a key differentiating factor for Aurora that was expected to insulate it from supply problems in Canada.

Today, however, Aurora is somewhat of a shell of its former self. The company has halted construction on two of its largest projects (Aurora Nordic 2 in Denmark and Aurora Sun in Alberta) and sold its 1-million-square-foot Exeter greenhouse, which was never retrofit from vegetable production to grow cannabis. In total, Aurora's peak annual output has been slashed by more than 400,000 kilos, at least for now.

Likewise, the company's overseas assets haven't paid dividends. Aurora has struggled to generate more than $4 million Canadian to CA$5 million in quarterly sales from international markets, which is nothing more than a drop in the bucket considering its annual run-rate output of around 150,000 kilos of cannabis per year.

A paper certificate for shares of a publicly traded company.

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Aurora is among some very rare company at the moment

All of these struggles pushed Aurora's share price down by more than 90% from its mid-March 2019 high and led management to declare a 1-for-12 reverse split, which was effected on May 11, 2020. This split became necessary to get Aurora's share price safely back above $1 per share and avoid delisting from the New York Stock Exchange.

Although a reverse split -- or any traditional split for that matter – doesn't involve a change in market cap, there's certainly a negative connotation associated with reverse splits. Historically speaking, the vast majority of companies that enact a reverse split tend to see their share prices decline even more. According to data from Credit Suisse's equity derivative strategy group, for nearly every year between 1980 and 2009, the median return in the month following a reverse stock split was negative. 

However, Aurora Cannabis is bucking convention in its first month following a reverse split. After reporting its fiscal third-quarter operating results, which were widely viewed by Wall Street to be better than expected, Aurora Cannabis' share price more than doubled. Now a full six weeks after its reverse split, Aurora Cannabis' share price has gained 66%.

Significant gains following a reverse split are very rare. For example, travel website Booking Holdings, which you might remember best as Priceline.com, enacted a 1-for-6 reverse split in June 2003, sending its share price from a little over $4 to $25. Today, a single share of Booking goes for $1,627, representing a 64-fold increase in value since its reverse split.

Brand-name companies such as American International Group and Citigroup have also increased in value following a reverse split. But, again, it's rare. That's what makes Aurora Cannabis' strong move higher something exceptional, at least for the time being.

A man chewing on a pencil while closely examining figures from his printing calculator.

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The important thing to remember about Aurora Cannabis

But there's something that Aurora's shareholders and prospective investors need to understand about reverse splits. Though they consolidate a company's outstanding shares and increase its share price (thusly have no effect on market cap), a reverse split doesn't wave a wand and make operational issues disappear. In other words, the issues that were plaguing Aurora Cannabis prior to enacting a reverse split are liable to remain in place afterwards.

For example, Aurora's reverse split may have saved the company from being delisted, but it doesn't change the narrative that the company's balance sheet is a mess. Aurora continues to lean on at-the-market stock offerings to raise capital, which means its outstanding share count keeps rising. Following its split, the company's share count has skyrocketed from about 1.3 million shares in June 2014 to probably 113 million, following the all-share Reliva acquisition last month. The constant need for capital raises means ongoing dilution for shareholders.

Aurora Cannabis is also lugging around a mountain of goodwill and a growing amount of inventory. I've opined that more than half of Aurora's assets may eventually need to be written down, and a reverse split isn't going to mask that possibility.

Beyond its balance sheet, Aurora still needs to find a way to effectively grow its international business, as well as manage its costs after overextending itself on the capacity front.

In short, Aurora may be in rare company now following its reverse split, but the narrative hasn't changed.