At nearly the halfway mark of September, Aurora Cannabis (ACB -0.15%) has been one of the hottest stocks to own this month. It finished August at just $0.48, and on Monday, it closed at $0.91, nearly doubling in less than two weeks.
Aurora and other pot stocks have been rallying on talks of marijuana reform in the U.S., including potentially rescheduling cannabis down from a Schedule I substance to Schedule III. Aurora has been a risky investment in the past, but the company has been making strides at improving its financials, and there is the potential that the stock may rise even further in value in the weeks ahead.
The company has been slashing its expenses as it aims for positive cash flow
Aurora has been making an effort to reduce its costs in the hopes of reaching profitability and improving its cash flow. This month, it announced that it had recently repurchased $9 million in convertible senior notes, which will reduce its interest expenses.
The company says that since December 2021, it has repurchased $306 million in convertible senior notes and estimates that has reduced its interest costs by nearly $24 million. CEO Miguel Martin says the company has "one of the strongest balance sheets of the Canadian LPs" and projects that before the end of next year, the company will be generating positive free cash flow.
Positive free cash flow would be a huge accomplishment for Aurora. Simply generating positive operating cash flow is something marijuana companies strive for. Free cash flow is after accounting for capital expenditures and is a sign of even stronger financials.
Over the years, Aurora has struggled with cash flow, but it has been making some steady progress this year.
ACB Cash from Operations (Quarterly) data by YCharts
Why this hot stock could go even higher
Despite its strong gains in September, Aurora could be on its way to an even higher valuation. Not only is the company improving its financials, but the stock has taken a beating over the years, which could make the stock overdue for a rally. Here's a look at just how badly Aurora Cannabis stock has performed in recent years:
| Year | Stock Performance |
|---|---|
| 2022 |
-83% |
| 2021 |
-35% |
| 2020 |
-68% |
Aurora has burned investors badly over the years, but its beaten-down valuation also means there's potentially a lot more upside for the stock now that it appears to be getting its house in order. And with pot stocks gaining more attention due to talk of marijuana reform, Aurora is in prime position to benefit from these developments.
The company has achieved positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for three straight quarters. Cash flow has been improving, which means the company's operations are becoming more sustainable. If Aurora can achieve positive free cash flow, that also means less risk of dilution in the future. With a more positive outlook, investors are starting to feel more bullish about the stock again, which can lead to an even greater rally as the month goes on.
Aurora Cannabis isn't out of the woods just yet
Aurora has a lot of upside, but for its stock to net big returns for investors, the company has to deliver on its promises and prove that it has turned its business around. It isn't there yet. And there are still question marks about its growth.
The company did achieve impressive 50% year-over-year revenue growth in its latest earnings report (for the period ending June 30) with sales topping 75.1 million Canadian dollars, but that was largely due to new revenue from Bevo Farms, which Aurora now has a controlling interest in (it acquired it in August 2022). Bevo Farms is in the plant propagation business, and its revenue wasn't included in Aurora's prior-year results.
Aurora's focus, however, remains predominantly on the medical marijuana market, where growth prospects aren't nearly as promising as in the recreational market. Investors need to brace for the reality that Aurora likely won't continue growing at such fast rates. Bevo is also a seasonal business, which Aurora says generates nearly three-quarters of its annual revenue during the first half of the year -- Aurora's top line will likely look less impressive in upcoming quarters, and that could have a big impact on earnings.
Should you invest in Aurora Cannabis stock?
It may be tempting for cannabis investors to buy into this red-hot rally, but the prudent thing for investors to do is to wait and see how Aurora performs in future quarters. Even if the stock continues soaring in September, the danger is that there could be a reversal next month. That is the kind of volatility that seasoned cannabis investors have become accustomed to.
This has been an incredibly risky stock to own, and investors should be extra careful when it comes to Aurora Cannabis. While you might miss out on some gains by waiting, you can also minimize the risk of a huge sell-off by waiting to see that the company's financials have significantly improved before deciding to buy the stock. Until Aurora Cannabis starts generating positive cash flow consistently, investors are better off putting the stock in their watchlists rather than in their portfolios.
