Stock splits are encouraging developments because they mean that a stock has been performing well. At a high price tag, the company can justify slashing the stock price in half (or more) so that it becomes accessible to a wider pool of investors. Alphabet recently announced a mammoth 20-for-1 stock split that will take place in July.
However, not all stocks are going in that direction. Some have to take on reverse stock splits simply to stay on a major exchange like the Nasdaq or NYSE if their shares fall below $1. One company that could end up going that route (again) is marijuana producer Aurora Cannabis (ACB -1.15%).
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The stock has fallen more than 60% in the past year
Like many cannabis companies in Canada, Aurora has been struggling. Not only have profits remained elusive but even generating consistent growth is a challenge. In its most recent quarterly results, for the period up until the end of March, sales of 50.4 million Canadian dollars were down 9% year over year and 17% from just the previous quarter. The positive the company will point to is that its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was only a negative CA$12.3 million during the period -- lower than the CA$20.9 million loss it reported during the same quarter last year.
Unfortunately, that's not enough to get investors excited about the stock today. Aurora's stock losses of 61% over the course of the past 12 months are only slightly worse than the 58% drop that the Horizons Marijuana Life Sciences ETF has been on during that period. In a high-risk marijuana sector where growth is far from guaranteed these days, Aurora has given no reason for investors to treat it as an exception. Trading at less than $3 per share, the writing may be on the wall for another reverse stock split in the near future.
Aurora previously did a reverse split in 2020
In April 2020, investors learned that the popular pot stock would undergo a reverse 1:12 stock split. Under that arrangement, shareholders would effectively give the company 12 of their shares and get just one back. By reducing the share count, that drives up the stock price and allows the stock to avoid running into problems with its share price being too low to stay on an exchange.
At the time, the stock was trading at around $0.80. It looked by doing such a significant reverse split, that would buy the business plenty of time to fix its business and make it a more attractive investment. That clearly hasn't happened.
While Aurora would still need to fall another 65% from where it is now to get below $1, it's definitely a possibility. Inflation and rising labor costs do the already struggling sector no favors and could make it more difficult for Aurora and its cash-burning operations to avoid issuing more diluting share offerings in the future. Plus, increased costs could derail its goal of hitting positive adjusted EBITDA.
This is a pot stock investors should steer clear of
Aurora is a business that's undergoing many changes. Gone are its high-growth days and the days where it was battling for the top spot in the sector along with its rival, Canopy Growth. Today, it's transitioning more toward medical products and tightening up its operations (e.g., cutting costs). Unfortunately, that isn't translating into great successes right now, and rising inflation will likely mean more of an effort is required to get out of the red.
Even if it hits its goal of reaching positive adjusted EBITDA, that still may not be enough of a reason to invest in the business. A big reason I wouldn't consider it: There are simply many other, more promising cannabis stocks out there to choose from right now that have also taken a beating over the past 12 months and are much-better buys.
