It has been almost five years since Canada first legalized marijuana for recreational use. At the time, you may have been tempted to invest $1,000 into a top cannabis producer such as Aurora Cannabis (ACB -0.15%) to see how it might do in the future given the promising growth opportunities ahead. Unfortunately, to say that things haven't gone well for Aurora -- or many other Canadian producers -- would be a huge understatement. Here's just how bad things have been since then.
Shares of Aurora were trading at around $7 -- before the reverse split
If you look up Aurora's stock price on Sept. 4, 2018, some websites may say $81.60. That's adjusted for the massive reverse stock split the company made in 2020, when it consolidated 12 shares into 1. The real price as of the close on that day was $6.80.
If you'd invested $1,000 at the time, that would have given you 147 shares of the pot producer. But with the stock price in a free fall in 2019 and the start of 2020, Aurora was struggling to keep its stock price above $1. That's a key threshold it has to stay above to remain listed on the NYSE, the exchange where the stock was trading on at the time. In May 2020, in order to boost its share price, it consolidated its shares on a 12-for-1 basis. That means you would have received just 12.3 shares in return for your original 147 that you acquired.
On Monday the stock closed at $0.863, as it faces the prospect of another reverse stock split in its future. For now, you would still own 12.3 shares of the business. A stock split, even if it's a reverse split, doesn't alter the value of your investment. But generally, struggling stocks that have suffered significant declines often need to deploy reverse splits to keep their share prices up and maintain listing requirements. Split or not, Aurora investors have incurred deep losses.
At the stock's current valuation, that original $1,000 investment would now be worth approximately $10.62. Your investment would literally be worth a few cups of coffee at this point.
Investors shouldn't bet on a turnaround
Aurora has been working on slashing costs, as it has now achieved positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for three straight quarters and expects to generate positive free cash flow by the end of next year.
But once the company starts to grow again, costs and overhead will increase, and there is the potential for the business' financials to deteriorate again. Getting to breakeven is great, but investors also need to see a path for revenue and earnings growth. Focusing on small international cannabis markets isn't likely to lead to a big pay off for investors. And unfortunately, its home Canadian market is ultra competitive, with too many producers and too many restrictions that weigh down cannabis companies.
Aurora needs more than positive adjusted EBITDA and positive free cash flow -- it also needs to achieve that while growing its operations. The recent acquisition of Bevo Farms has boosted Aurora's top line, but once that effect subsides, the company will once again be back to struggling to generate positive top-line growth.
ACB Revenue (Quarterly YoY Growth) data by YCharts.
Aurora's stock may be cheap, but it still isn't a good buy
Aurora Cannabis trades at less than its book value and a multiple of only 1.5 times revenue. It's also down around 99% over the past five years. There's no question its valuation is incredibly low, with its market cap around $330 million. But despite the company's cost-cutting efforts, there's still much more management would need to do to make this an investable business. Buying the stock might allow you to profit from short-term fluctuations due to various developments affecting the cannabis industry at large that aren't necessarily specific to the company, but at that point, you've become a speculator rather than an investor.
For long-term investors, it's hard to justify buying the stock. This is a business that still faces significant challenges ahead. The cannabis industry is risky enough as it is; there's no reason to compound that risk by also investing in Aurora Cannabis.
