Despite a rough year for the stock market, the green flag has been waving in full force for most North American cannabis stocks. An election night sweep in five U.S. states, coupled with Ontario finally getting its act together on the dispensary licensing front, has rolled out the green carpet for pot stocks.
Well, most pot stocks, anyway.
Aurora Cannabis (ACB 0.58%), the most popular marijuana stock in the world, has been nothing short of a train wreck in 2020. Shares of the company are off 58% year-to-date, yet have nearly tripled over the past five weeks. After a volatile and disappointing 2020 campaign, investors are left to wonder if it's finally time to buy into Aurora Cannabis.
Before casting my verdict, let's take a closer look at some of the key reasons Aurora would and wouldn't be worth buying right now.
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Here's why 2021 could be a much greener year for Aurora Cannabis
Arguably the biggest catalyst for Aurora is its executive turnover. As I'll describe a bit later, the company's previous management team put it in a serious bind. Since longtime CEO Terry Booth resigned, Aurora has made tangible financial progress by slashing expenses and reducing its cash burn. This included closing five of its smaller production facilities to take advantage of economies of scale at its larger cultivation farms, as well as halting construction at its two biggest projects to conserve cash.
The company is also likely to benefit from Canadian regulators continuing to work out a number of kinks. For example, Ontario abandoned its lottery system for dispensary licenses at the end of 2019, and went with a more traditional application vetting process. Between October 2019 and September 2020, the number of open retail locations in Canada's most-populous province catapulted from 24 to 150. More open locations in key provinces means more opportunity for Aurora to get its products in front of consumers.
Additionally, don't overlook the slow but steady growth of Cannabis 2.0 products. "Cannabis 2.0" describes the alternative consumption options that launched roughly a year ago, such as edibles, vapes, infused beverages, concentrates, and topicals. In the fiscal first quarter, ended Sept. 30, Aurora notes that consumer cannabis extract net revenue jumped by $3.6 million Canadian from the sequential fourth quarter. This likely played a key role in helping to boost its adult-use cannabis adjusted gross margin (before fair-value adjustments) by 3 percentage points to 38%.
A final positive catalyst to consider is Aurora's bountiful international presence. Assuming we see a broader uptake of medical cannabis in Europe and recreational weed in Mexico, Aurora could finally begin adding some key puzzle pieces to its long-term operating model.
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The upcoming year might also be more of the same -- and that's not good
While there are certainly reasons for investors to believe Aurora's worst days might be behind it, there are an equal number of reasons to be concerned about its future.
The single-biggest issue for the company continues to be its ability to access capital. Despite some serious cost-cutting, Aurora is still a long way away from recurring profitability, and is burning through a lot of its cash on hand. As a result, the company has financed its operations and acquisitions by selling stock, often through at-the-market (ATM) offerings. Since April 2019, it's completed a $400 million (that's U.S.) and $250 million ATM offering, with its board recently approving another $500 million ATM offering. In simpler terms, Aurora Cannabis is diluting the daylights out of its shareholders to fund its operations. In a little over six years, the company's outstanding share count has risen by 11,800%, and this figure shows no signs of slowing.
Another clear concern has been the behavior of Canadian cannabis customers. Even though Canadian regulators purposely enacted a perceived-to-be low 10% tax rate on legal cannabis sales, it's made it difficult for licensed producers to compete with the black market on price. In order to really take on illicit producers, growers like Aurora have had to turn to value-brand flower products. This has helped to boost aggregate sales, but margins on dried flower have gone down the tubes. This will likely continue throughout 2021.
Even the new management team comes with faults. On multiple occasions we've watched Aurora Cannabis redraw the finish line as to when it'll reach positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Reaching positive adjusted EBITDA is a condition laid out by the company's lenders. If Aurora fails to improve its operating results, its survivability comes into question.
As one final note, the company is still trying to improve its balance sheet. The previous management team left Aurora with a boatload of overvalued and unnecessary assets.
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The verdict
Now for the $64,000 question: Should investors buy Aurora Cannabis?
After weighing both sides, my answer is decidedly no.
To be clear, Aurora Cannabis isn't devoid of long-term catalysts. It could very well be an industry leader in low-cost cannabis production, and its international presence could eventually pay dividends. The door isn't closed on its success.
However, management continues to put shareholders over a barrel. The company's steep losses will result in ongoing share issuances for the foreseeable future. It's unclear when the company's cash burn will shrink enough to reduce or eliminate these value-crushing ATM programs.
Further, it's become impossible to trust the company's guidance when the profitability/adjusted EBITDA goalposts keep getting moved. If investors can't trust Aurora's management team, there's no reason to put your money to work in this company.
More than likely, it'll be one of top pot stocks to avoid in 2021.
