Despite all eyes being on high-growth tech stocks, it's marijuana that could be one of the fastest-growing industries over the next decade. We already know that tens of billions of dollars are sold annually in the North American black market each year, so it's only logical that legalizations should steadily move consumers toward legal channels.
Perhaps no cannabis stock has been more popular among the investment community than Canadian licensed producer Aurora Cannabis (ACB -0.23%).
Aurora Cannabis was supposed to be the greatest thing since sliced bread
Why Aurora? At this time last year, Aurora Cannabis was projected to be the world's leading marijuana producer. It had 15 production facilities that, if fully operational, could yield well over 600,000 kilos per year. Given the size of Aurora's numerous grow farms, it was expected that the company would be a leader in low-cost production.
Additionally, Aurora Cannabis had a production, export, partnership, or research presence in two dozen countries. Being able to produce so much cannabis, the company looked like a solid bet to land numerous supply agreements.
The investment community was also pretty excited about the onboarding of billionaire activist investor Nelson Peltz as a strategic advisor in March 2019. Peltz's expertise is in the consumer-packaged foods and beverage space, so it's long been assumed that he would act as the bridge between Aurora and a brand-name food and beverage company.
Unfortunately, Aurora Cannabis has been a disaster of an investment, and its balance sheet a monumental eyesore. Last week, Aurora's management team decided it was finally time to face the music and address its balance sheet.
Aurora Cannabis (finally) confronts its ugly balance sheet
In a press release last Tuesday, Sept. 8, where Aurora Cannabis named its new CEO and pre-announced its fiscal fourth-quarter sales guidance, the company also unveiled a laundry list of impairments that it would be taking. These include:
- An up to $90 million Canadian impairment tied to the closure of five of the company's smaller production facilities.
- An approximate CA$140 million charge related to the carrying value of certain inventory.
- A non-cash writedown of goodwill and intangible assets (the company didn't provide a breakdown of each category) that could total between CA$1.6 billion and CA$1.8 billion.
In other words, investors could be looking at Aurora Cannabis taking a writedown of close to CA$2 billion, or twice the company's current market cap.
These writedowns should not come as a surprise to anyone who's followed Aurora Cannabis over the past couple of years. I've warned time, and time, and time again that Aurora's acquisitions were grossly overvalued, that the company's property, plant, and equipment values were far too high given current market conditions, and that inventory would likely face writedowns. All told, the company will have written down around CA$3 billion in total assets this calendar year.
The fact is that this needed to be done, I applaud Aurora's management team for finally facing the music. The balance sheet isn't going to be perfect when the June-ended quarter is made official, but Wall Street and investors will be able to wrap their hands around figures that might be in some way tangible.
Aurora addresses a big concern, but it's still not worth buying
Back in June, I'd stated that three things needed to happen for Aurora Cannabis to rebuild trust with investors. Cleaning up the company's balance sheet was one of those three things. Unfortunately, the other two "musts" on that list haven't yet been dealt with -- and for that reason, the company is still worth avoiding.
One factor that still hasn't been addressed is the company's rampant share-based dilution, which has been ongoing for what seems like four years and counting. Aurora has made a habit of using its stock as collateral when making acquisitions.
Management has also leaned on selling stock as a means of raising capital. Earlier this year, its board gave the OK for the company to issue up to $350 million (that's in U.S. dollars) in stock over a 25-month span to raise capital. In a six-year stretch, including the company's 1-for-12 reverse split enacted in May, which is what kept it from being delisted from the New York Stock Exchange, Aurora's share count has ballooned from 1.3 million to well over 110 million. Until this share-based dilution slows considerably and the company improves its cash position, it's not worth investors' hard-earned money.
Likewise, Aurora needs to find a way to ignite growth in international markets. Though the purchase of cannabidiol-focused company Reliva in the U.S. should somewhat help, the company has got to find a way to generate significant revenue from burgeoning European countries where medical marijuana growth looms strong.
Even with aggressive cost-cutting efforts, it doesn't look as if Aurora Cannabis is on track to reach recurring profitability in fiscal 2021 (the company's fiscal year ends June 30). With numerous U.S. multistate operators nearing that turn to profitability, and supply roadblocks still prevalent throughout Canada, Aurora Cannabis should remain out of investors' portfolios.