When Canada legalized recreational marijuana on Oct. 17, 2018, investors flocked to the companies in the sector under the belief that an entire global market was about to open. That set off a bubble for many pot stocks -- one that deflated as reality set in that federal legalization in the U.S. was still a long way off.
One of the most widely held marijuana stocks has been Aurora Cannabis (ACB 1.75%). But in the years since the Canadian market opened, its share price has dropped by 93%. Given those relative lows, investors may wonder whether it's oversold and due for significant gains in the quarters ahead. A look at the underlying business offers some clues about the answer to that question.
Aurora management has been trying to improve its business fundamentals since it launched a transformation plan early in 2020. The goals are to reduce expenses, better scrutinize capital expenditures, and improve the balance sheet en route to attaining profitability.
The company seemed to be making progress, and management had said it was on track to report positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) this year. But in a recent business update, Aurora said its "back to basics" business strategy "will delay the Company's ability to achieve positive Adjusted EBITDA as management invests in its consumer business."
That's not good news for investors. There's little doubt that the trend toward legalizing marijuana has momentum. It's happening at the state level, but U.S. federal legalization is likely still fairly far off. That is likely the only route for Aurora's business to thrive. Investors looking to invest in the cannabis sector in 2021 can find companies other than Aurora that have growing revenue and clearer paths to profitability.