It may seem like a bad idea to get into the stock market right now. But usually, a market slump creates good buying opportunities. Investors can find excellent growth stocks at a bargain that can spark up their portfolio in the long run. Marijuana is one such sector with outstanding potential. The global legal marijuana market could grow at a compound rate of 25% by 2030.
The industry is loaded with exceptional pot stocks with strong financials that can be bought on the dip now. However, there is one pot stock that might best be avoided at all costs.
Canadian pot company Aurora Cannabis (ACB -6.60%) has been on a downward spiral for the last two years. Its failed attempts to rebound are evident from its consistent unimpressive quarterly results. Its recent third quarter (ended March 31) revealed a similar story. Let's dig into why this pot stock would make a sour investment now.
History repeating itself
Nothing seems to be different for Aurora Cannabis this year. Its gloomy Q3 fiscal 2022 results failed to please investors. The stock is down 71% so far this year, compared to the benchmark Horizons Marijuana Life Sciences ETF's fall of 35%.
Aurora's revenue fell 9% year over year to 50 million Canadian dollars. Sequentially, revenue dipped 17% from CA$60 million in Q2. Its consumer cannabis revenue took a drastic hit of 43% to CA$10 million driven by industrywide pricing pressure, according to management.
Peer Canopy Growth's recreational cannabis revenue also declined 36% year over year to CA$30 million in its fourth quarter ended March 31, which may support Aurora's claim of the impact being widespread.
However, medical cannabis revenue for Aurora jumped 8% to CA$39 million from the year-ago period but was not enough to bring in profits. This overall dip in revenue led to another quarter of adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) losses, which stood at CA$12 million.
Image source: Getty Images.
A rocky road for Aurora
Aurora has repeatedly failed to meet its promises in the last two years. But yet again in its Q3 results, it reassured investors it would be EBITDA-positive by the end of fiscal 2023. For that to happen, it has to grow its revenue drastically while keeping costs lower. I see minimal chances of Aurora posting a profit anytime sooner.
The pot grower expects to achieve a higher annualized cost savings in the range of $150 million to $170 million by the first half of fiscal 2023. This target is higher than its earlier estimate of $60 million to $80 million, which it expects to realize from the closure of the Aurora Sky facility in Edmonton (operating at 25% capacity). These cost savings are a result of the "facility rationalizations" plan it started in 2020, which included closing down unproductive facilities and focusing on productive ones.
The cost savings helped Aurora reduce its Q3 EBITDA losses, which came in much lower than the loss of CA$20 million in the year-ago period. This is a good sign but it doesn't guarantee a path to recovery. Revenue growth is still insufficient to help Aurora see green on its bottom line.
On the earnings call, management detailed Aurora's plan to launch 40 new products (medical and recreational) between April and July to boost revenue. It is high time Aurora launches new products to keep up with its peers and the expanding cannabis market. But I worry whether it is financially sound enough to bear this burden, as launching new products involves spending money.
In the previous quarter, it announced its decision to acquire Ontario-based Thrive Cannabis to boost its Canadian recreational business in exchange for CA$38 million in cash and Aurora's common shares. But an acquisition at this point with an already heavy balance sheet doesn't seem like a wise decision.
The company claims to have the strongest balance sheet in the industry with CA$455 million in cash. But most of it has been raised by issuing new shares. Excessive share dilution doesn't sit well with investors, which is seen as a sign the company is failing to raise capital through any other means. At the end of March 2020, Aurora had total outstanding shares of about 100 million, but the number has gone up to 215 million shares as of the quarter ended March 2022.
A bearish outlook
Aurora has a long way to go. The U.S. cannabis market could be an exciting opportunity to boost revenue but it's a long shot until federal legalization (if and when it happens). Plus, Aurora isn't financially sound and doesn't have any strong partners backing it to expand in highly competitive markets, as peers Canopy Growth and Tilray Brands do. It could take Aurora a few more years to become stable if it manages to do everything right. Until it shows some significant numbers, I would suggest investors steer clear of this marijuana stock for now.
