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Robinhood Investors Love This Marijuana Stock. Here's Why You Should Avoid It at All Costs

By Zhiyuan Sun – Jul 20, 2020 at 11:00AM

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Just because Aurora Cannabis has become popular among traders doesn't mean it will do well for investors.

As of Friday, cannabis producer Aurora Cannabis (ACB 1.60%) was the 11th most widely held stock among Robinhood users. More than 447,000 investors held it in their portfolios on the platform.

The stock's performance, however, has not reflected that popularity. A modest $10,000 investment made one year ago in Aurora Cannabis would at the end of last week have been worth just $1,336 -- an 87% decline.

By contrast, if an investor had put that $10,000 into an index fund tracking the S&P 500 (and held on patiently through all the market's oscillations), their investment would have grown to $10,850.

Let's explore why I think investors would be smart to avoid shares of Aurora Cannabis now.

Man staring at declining stock price on tablet.

Image Source: Getty Images.

Big cash burn, and not much cash to burn

As of the end of its fiscal third quarter on March 31, Aurora Cannabis had approximately $230 million Canadian dollars in cash and CA$12 million in marketable securities. That's not a lot of liquidity considering it also has CA$293 million in long-term convertible debt and CA$246 million in long-term loans. Add in its CA$32 million in short-term convertible debt and CA$22 million in short-term loans, and that's a total of about CA$593 million in debt.

Meanwhile, Aurora Cannabis is still not profitable. In its fiscal Q3, it recognized CA$75 million in revenue, but more than CA$83 million in corporate expenses and nearly CA$64 million in impairments. In the first nine months of its fiscal year, Aurora Cannabis brought in CA$207 million in revenue, but recorded a net loss of CA$1.4 billion, which is a huge acceleration in losses compared to the prior year.

Production facility closures will slow it down

As a part of its second round of restructuring measures, Aurora Cannabis has cut 25% of its sales, general, and administrative staff, and plans to lay off 30% of its production staff by the end of calendar 2020. A total of 700 employees will be let go from Aurora Cannabis. That's a lot for a company that had just 2,779 employees last year.

Moreover, Aurora Cannabis is shutting down five production facilities across Canada, and will be taking a CA$140 million impairment to its inventory. Considering its inventory only amounted to CA$251 million in its fiscal Q3, these restructuring efforts signal that things have gone terribly wrong with its growth plans.

Indeed, while the company boasted an annual cannabis production capacity of 150,000 kg last year and had a projected production capacity of 500,000 kg this year, its near-term future looks far less optimistic. In fiscal Q3, Aurora Cannabis harvested just 36,000 kg of marijuana (144,000 kg annualized). Even worse, it sold just 13,000 kg of marijuana during the quarter (52,000 kg annualized). That's about a tenth of what the company estimated in terms of demand for cannabis in Canada.

Goodbye, goodwill

Unfortunately, the problems Aurora Cannabis faces only look worse due to its goodwill issues. Goodwill is an intangible asset -- the value of a company's brand, its unique technology and intellectual property, and its relationships with customers and employees, among other tough-to-measure, but vital, parts of a business. Those intangibles largely account for the premium a buyer will pay above book value when acquiring a target company -- and Aurora has been a buyer.

The value is treated as a non-cash item and must be written down as an impairment if the acquired company's underlying business underperforms. 

In its most recently reported quarter, Aurora Cannabis had more than CA$2.4 billion of goodwill on its balance sheet, accounting for more than half of its CA$4.7 billion value. In the first round of restructuring, it wrote off nearly CA$1 billion in goodwill -- in essence recognizing that it had overpaid for many of the assets it acquired. Goodwill now accounts for a majority of its CA$3.9 billion in shareholder equity, and may require further write-downs. 

The bottom line 

At the end of the day, Aurora Cannabis is not a shareholder-friendly company. Due to its significant goodwill impairments, production woes, and heavy debt burden, Aurora has had to keep raising cash via stock offerings to make up for its losses. Since 2016, the number of shares of Aurora Cannabis outstanding has grown from 10 million to over 100 million.

For all of these reasons, I think there are much better options for investors in the cannabis industry. There's no reason to risk buying into a company that has already diluted its shareholders by a factor of 10 over the past four years to compensate for its operational woes.

Zhiyuan Sun 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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