Genius investments are sometimes the stocks that the hoi polloi dismiss as being hopeless. Investing in Aurora Cannabis (ACB -0.15%) right now would fulfill at least the latter half of that criteria, given that its shares are down by roughly 99% in the last five years.
Despite its recent attempts to right the ship by getting a new CEO in 2020, slashing costs, and trying to reach profitability, the market clearly hasn't received this stock warmly, and shareholders have been retreating for quite some time now. But could this stock be a diamond in the rough, with its true value yet to be revealed by a diligent effort from management? Let's answer this question by making the strongest possible case for buying Aurora Cannabis to find out.
Why buying it might have the whiff of brilliance
There are two pillars of the bull thesis for Aurora: Its potential to grow its top and bottom lines simultaneously by competing in the medicinal marijuana market, where it is a leader, and its cheap valuation.
In terms of its growth potential, the company's management claims that its focus will be on profitable expansion in all of its segments, especially international medicinal cannabis. Sales of medicinal cannabis represented 64% of its net revenue in its fiscal Q2 of 2023, totaling 39.5 million Canadian dollars -- an increase of 25% compared to Q1. But, year-over-year, the segment shrank by 14%, so the growth trend isn't unassailable. And when looking at Aurora's top line over time, its CA$61.7 million in revenue in the second quarter is barely higher than the prior year's total of CA$60.6 million.
Nonetheless, Wall Street analysts estimate on average that the business will bring in CA$202.1 million in FY 2023, and then around CA$277.1 million in FY 2024. That implies a slight drop compared to its CA$211.5 million in trailing 12-month (TTM) sales, then a large amount of growth in the year afterward. But analysts still expect it to be unprofitable by the end of FY 2024. So the first pillar of the bull thesis looks to be a bit shaky, to say the least.
The second element is a little bit sturdier. On the basis of its price-to-sales (P/S) ratio, Aurora's valuation is undeniably a bit lower than many of its competitors, like Tilray Brands, Curaleaf, Green Thumb Industries, and Canopy Growth. Take a look at this chart:
ACB PS Ratio data by YCharts
The more subjective question is whether the lower valuation actually implies a bargain today given the expectations for growth in the future. On that note, it's worth mentioning that over the last 12 months, the analysts covering Aurora Cannabis have on average revised their revenue estimates slightly downward for FY 2023, FY 2024, and even FY 2025. Their predictions will certainly continue to change, and there's no guarantee that they'll be anywhere near the mark, but the trend isn't favorable for now.
It's hard to see how the low valuation is a bargain because the expectations for the stock aren't positive, and there's little indication of any progress that would warrant a reassessment of the upside.
It's probably not a smart move for most investors right now
None of the above is to say that Aurora Cannabis is doomed to fail or that an investment made in the near future is a surefire way to lose money. It's still possible that there is some hidden combination of factors that'll power it to victory in the next few years and make shareholders wealthier along the way. Furthermore, hard-to-pinpoint wildcards like making products that customers love could lead to unexpectedly strong performance -- but I wouldn't bet on it.
The company's persistent struggles to grow and reach profitability at the same time don't appear to be getting better, and that means buying the stock right now entails major risks that simply aren't going to be worth it for the potential upside. Check back in two or three quarters to see if the picture is changing, because if it is, there'll be an opportunity to make money by betting on the continuation of Aurora Cannabis' turnaround. Until then, it's closer to being a foolhardy move than a brilliant one to buy this stock.
