With a bear market in full swing, now just might be the time to invest in fallen growth stocks like Aurora Cannabis (ACB -7.79%). Its shares collapsed by more than 70% in the last six months alone, and there's no indication that the downtrend is reversing.
That makes a purchase feel especially risky, even if short-term price movements don't have much to do with the stock's long-term performance potential. Still, correctly calling a turnaround could lead to outsize gains -- so is Aurora Cannabis an investment that's going to make you richer over the next year, or is it too risky to touch for now?
Why this stock could be a great investment
The argument for why Aurora Cannabis stock could be a good investment starts with the growth of its top line and the increasing value of its brands. In the last five years, its quarterly revenue climbed by 327.2%, reaching $39.3 million, driven by its penetration of the Canadian recreational and medicinal markets. In the recreational cannabis market, it has brands positioned for everything from cheap flower to high-end vapes, concentrates, and even more exotic product formats like sublingual films. That means as consumer preferences develop, there's a solid chance they'll develop in a direction that's building loyalty to one of the company's product lines and shore up its base of revenue for years to come.
Furthermore, Aurora claims to have the largest medicinal cannabis market share in Canada, its home market, and it also has medical market leadership in Poland. Its therapeutic dried flower products are competitive in Germany, and its operation in Australia saw a 300% increase in revenue during the 2022 fiscal year. If these countries move to legalize cannabis, the company will have an advantage in spinning up recreational sales before the competition, which could definitely make investors richer.
Finally, it could be tackling some of the long-standing issues with operational inefficiencies and overproduction of cannabis that have prevented it from being profitable. In May of this year, it closed a cultivation site in Canada, laying off 13% of its global workforce in the process and making progress toward scaling its output to be more in proportion to demand. As a result, management anticipates that it should have positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) on an ongoing basis by the end of 2022.
Why the chances of losing your shirt shouldn't be ignored
Even if management is correct about Aurora's adjusted EBITDA performance by the end of the year, it's still a very risky stock. First and foremost, investors need to recognize that reaching consistently positive EBITDA on an adjusted basis is not the same as producing free cash flow, nor is it the same as being consistently profitable in a way that generates capital that might be returned to shareholders. Nor is there much in the way of progress to believe that things are improving.
Over the last three years, the company's quarterly gross margin actually fell, and its total expenses are still more than 228% when expressed as a proportion of its quarterly revenue. That suggests it won't become profitable anytime soon, even with the recent cuts. What's more, its quarterly revenue declined by 5.9% in the same period, and there's no indication of it trending back toward its highs in 2019. Reading between the lines, that means Aurora might need to win fights for market share with its competitors to keep growing, as it can't seem to capture or retain revenue by doing its usual. And fighting for market share is a surefire way to spend more money for each dollar of sales.
Nonetheless, it's entirely possible that Aurora will survive past 2023, as its 380 million Canadian dollars in cash and equivalents is more than enough to cover its trailing-12-month cash outflows of CA$142 million moving forward, especially when considering the production cuts. But survival isn't the same as making shareholders richer.
Therefore, it isn't the end of the line for this company just yet, but that doesn't mean you should invest in it until it looks like it's at least making some headway on its twin bugbears of profitability and revenue growth. And while it technically could make you richer if a disruptive event like cannabis legalization happens and its stock shoots up, there are better bets to be found elsewhere.