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Will Aurora Cannabis Stock Go to $0?

By David Jagielski - Dec 4, 2020 at 7:15AM

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Or could it be a good contrarian buy?

It's easy to be down on a stock like Aurora Cannabis ( ACB -5.21% ). The stock has fallen more than 60% in the past 12 months, while the S&P 500 is up 18% over the same period. The company continues to issue more shares, and is struggling to grow and stay out of the red. But for one analyst from GLJ Research to suggest that the stock is worth zero seems extreme, even if you're really bearish on pot stocks.

The stock has shown signs of life lately, coming off a fantastic month in November when it rallied close to 190%. Below, I'll take a look at whether this is the start of a new, more positive trend for Aurora or if it really is in danger of going to zero and investors should jump ship.

Cannabis greenhouse.

Image source: Getty Images.

A $0 price target is more attention-grabbing than it is realistic

To say that a company is worth zero would suggest its assets have next to no value -- certainly not enough to cover its liabilities. And while you could discount items like intangible assets and goodwill, where valuations can sometimes heavily rely on estimates, Aurora would still have assets totaling 1.4 million Canadian dollars remaining as of Sept. 30 -- more than double the CA$603,000 it listed in total liabilities as of that date. The company has far more assets than it does liabilities, and it's far from worthless.

Setting a price target of zero is a great way to grab headlines and get people talking about the possibility of the stock going on more of a decline, but the arguments for the price target aren't terribly compelling. There were two main reasons the analyst gave for the valuation: (1) that Aurora's recent rise in price gave short-sellers an opportunity to take on greater short positions (which would push its price down), and (2) that Aurora's strategy isn't working and has been reset multiple times. But many top-performing stocks have short-sellers: Tesla's Elon Musk is known for battling short-sellers. With the automaker's stock up 780% in 12 months, it's fair to say he's been winning that war in spades. 

As far as strategy goes, Aurora isn't the only cannabis company struggling. When rival Canopy Growth fired its CEO Bruce Linton last year, there was hope that a greater focus on costs and the bottom line would make the company more investable. However, it's continued to incur losses, staying firmly in the red in each of the past four quarters.

The company still faces challenges and is currently in a "transition year." The one advantage Canopy Growth has over Aurora is that it's backed by beverage magnate Constellation Brands, giving it more resources to tap into should it need help. 

Aurora is struggling, but so are other Canadian pot stocks. Seriously changing course is necessarily a sign of business failure, especially in a relatively new industry like marijuana -- recreational use of the drug has only been legal in Canada since October 2018.

Will its rally continue?

On the flip side of things, investors may be wondering if Aurora's stock could continue rising and building off of last month's strong rally. I'm less optimistic about this because the main catalyst for Aurora and other pot stocks' ascension last month was Joe Biden's election win and four more states voting to legalize marijuana -- Arizona, Montana, New Jersey, and South Dakota.

Until the U.S. government legalizes marijuana at the federal level, the decisions of individual states won't mean a whole lot for Aurora. After all, if its marijuana products can't cross the U.S. border, there's no way for them to be sold in any state. That's why those gains may not hold up.

Aurora released first-quarter results for fiscal 2021 on Nov. 9 for the period ending Sept. 30, but those numbers weren't all that exciting, with net revenue of CA$67.8 million down 8% from the prior-year period. Gross profit before fair-value adjustments of CA$24.5 million was also 38% lower than the CA$39.6 million it generated in Q1 last year. So it's little surprise the company incurred a loss of CA$109.5 million for the period.

Aurora's focus, however, remains on its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) number, as its goal is to be positive by the second quarter. In Q1, its adjusted EBITDA loss was CA$57.9 million. However, the company notes that after further adjusting its adjusted EBITDA number to factor out employee termination costs and other restructuring-related expenses, its loss would have been just CA$10.5 million.

Because Aurora is lacking strong quarterly results and benefiting from political developments in the U.S. that likely won't impact its business, I wouldn't expect shares to continue rallying, especially if the company needs to raise cash again. In November, the company announced it would be issuing another 20 million shares to raise $150 million.

Is Aurora stock a buy?

It's unlikely that Aurora's share price will go to zero. As investors have noticed in November, even positive news from the industry in general has the ability to lift up shares of the company. And if Aurora does struggle, it can deploy another reverse stock split to boost its share price. Earlier this year, the Alberta-based company consolidated 12 shares into one to get its stock back up over $1 to avoid getting delisted from the New York Stock Exchange (NYSE).

But simply because the stock may not go to zero doesn't make it a good buy. There are serious challenges ahead for Aurora, and Q2 will be a big test. If the company can meet its target of a positive adjusted EBITDA number, it could be a good sign that the company is finally turning the corner. However, until there are some tangible financial results showing that Aurora is faring better, this is a stock investors should steer clear of.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$5.82 (-5.21%) $0.32
Tesla, Inc. Stock Quote
Tesla, Inc.
$1,014.97 (-6.42%) $-69.63
Constellation Brands, Inc. Stock Quote
Constellation Brands, Inc.
$226.19 (0.41%) $0.93
Canopy Growth Stock Quote
Canopy Growth
$9.99 (-3.57%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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