Two old investing adages might come to mind with Aurora Cannabis (ACB -0.15%). One is the popular mantra "Buy on the dip." The other, however, is a stark warning: "Don't try to catch a falling knife."
Aurora Cannabis has certainly qualified as a falling knife in recent years -- and in 2023. However, there are some signs of hope for the beleaguered marijuana stock. With its shares down a whopping 99.5% since early 2019, is now the time to buy Aurora Cannabis?
Reasons to buy Aurora Cannabis stock
Believe it or not, things are actually looking up for Aurora Cannabis. The company announced its fiscal 2024 second-quarter results on Nov. 9. And there was a lot to like.
First, Aurora's net revenue jumped 30% year over year to 63.4 million in Canadian dollars. Sales for the company's global medical cannabis products soared 42%. CEO Miguel Martin noted: "This is our strongest fiscal year to date."
Sure, the Canadian cannabis producer still posted a net loss of CA$0.3 million. But that was a lot better than the loss of CA$45.5 million in the prior-year period. What's more, Aurora generated record positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of CA$3.4 million.
The company continues to believe that it will generate positive free cash flow in calendar year 2024. This would be a huge milestone for Aurora. It could even dramatically change the investing narrative for the stock.
Then there's Germany. A final bill to legalize cannabis in the European country has been pushed back to early 2024. However, it's still possible that the German market could begin to open for legalized recreational cannabis next year.
Aurora has operated in Germany's medical cannabis market since 2017. It's one of only three cannabis producers with production facilities inside the country. Martin said in Aurora's latest earnings call that the company thinks "that most of the progress that you'll see in Germany will be on the medical side." He also added that Germany "has a lot of influence on Poland." If Germany legalizes cannabis, Poland just might follow suit.
Reasons to stay away from this beaten-down pot stock
Despite these reasons for optimism, Aurora Cannabis still faces a lot of problems. We can start with its home country. The Canadian recreational cannabis market remains a sore spot. Martin acknowledged this fact in the fiscal Q2 call, saying: "So we haven't given up on rec. I mean, rec is a challenge in Canada right now, particularly in certain geographies."
Aurora's sizzling revenue growth is also likely to taper off. CFO Glen Ibbott stated: "We expect cannabis net revenue to be largely similar to fiscal Q2, with the geographic mix weighted slightly further toward the international medical segment." In other words, expect roughly flat sequential revenue in the company's next quarterly update.
Another way to interpret Aurora's goal of generating positive free cash flow in calendar year 2024 is that it will likely continue to lose money over the near term. Many investors simply won't be interested in the stock of a company that remains unprofitable.
As for Germany legalizing cannabis, there have already been multiple delays in advancing the proposed legislation. Some in the country's parliament remain steadfastly opposed to legalization. Investors could prefer to take a wait-and-see approach.
Buy Aurora Cannabis?
Remember the recurring Peanuts cartoon scenario where Lucy holds the football for Charlie Brown to kick? Every time, poor Charlie ends up on his back after Lucy yanks the football away. I see some similarities with Aurora Cannabis.
Several times over the last four years, investors have seen sparks of hope with the stock only to be disappointed. It's easy to become jaded after so much disillusionment.
Is now the time -- at long last -- to buy Aurora Cannabis? I don't think so. My view is that it's better to wait until the company demonstrates that it can consistently generate positive free cash flow and profits. Don't speculate that good news could be on the way; wait for it to actually materialize. In the meantime, there are plenty of other stocks that offer much more attractive risk-reward propositions.
