If you're a fan of investing in turnaround plays, Aurora Cannabis (ACB -0.15%) is a stock that you should probably know about. The Canadian marijuana company is mapping out a path to ultimately overcome the intense turbulence it encountered over the last couple of years, and if management's guidance proves correct, it may even see its shares begin to appreciate in value.
But at the end of the day, it's still a risky pot stock in the midst of finding its footing, and there are a few potential stumbling blocks ahead. Here's what you need to know about whether to buy the stock or not.
Is this the start of the turnaround?
Aurora shareholders have had a (very) rough few years. The company's shares are down 96% compared to three years ago, and its quarterly revenue is down by 9% in the same period, leaving it with around 63 million Canadian dollars in sales. Multiple factors are to blame, starting with its now-abandoned leave-no-customer-behind strategy, wherein it seriously overbuilt its cannabis production capacity as well as its retail footprint in an attempt to seize as much of the Canadian marijuana market as possible.
At that time, the Canadian cannabis market was booming, with one gram of legal marijuana selling for around CA$6. But as more and more cultivation capacity came online between Aurora and its competitors, eventually there was more product on the market than there was demand. That caused prices to collapse, taking the margins of many companies with it. Aurora and its peers were forced to scale back their operations sharply as a result. Now, with the green shoots of the Canadian market's recovery starting to appear, one gram of cannabis is priced closer to CA$5. An improving price level could thus support recovery of margins and thus potentially synergize with a turnaround wrought from newly efficient operations. It's also making some headway in European markets like Germany, France, Poland, and the U.K., which might drive some faster revenue growth.
Thanks to a couple of years spent scaling down and reducing spending, CEO Miguel Martin maintains that the company will reach positive free cash flow (FCF) sometime in 2024. That looks a lot more possible now than it did a couple of years ago, when its cost-cutting transformation plan was in full swing. In its fiscal Q2, which corresponds to the quarter that closed at the end of September, it reported positive operating income of CA$2 million for the first time since early 2016. But it still lost CA$35 million in cash during the quarter.
At its current pace of spending, the business can sustain that cash burn rate for a while without worry. It still has $129 million in cash, equivalents, and short-term investments, and on Oct. 3 it closed a bought deal stock offering to raise CA$39 million in gross proceeds. Management doesn't think it'll need to pursue any at-the-market share offerings for the medium term. So if you decide to invest, you can be somewhat confident that your shares won't get diluted immediately. And if the company can continue to post positive operating income while finalizing the work of trimming its overhead, real profitability could be just a couple of quarters around the corner. At that point, the stock would likely see its valuation multiples expand, and further earnings growth could start to drive its shares upward.
There's an opportunity shaping up, but it's risky
Now is a more favorable time to buy Aurora Cannabis stock than in the last handful of years. The combination of its still-forming operational efficiency and the potential for rising cannabis prices could make for a steady comeback. It's possible that its shares will eventually fly once the market notices the progress it's made.
But if you aren't comfortable with a risky bet, this isn't the stock for you. The business's turnaround, while looking probable at the moment, is not in any way guaranteed.
Despite owning a bunch of different cannabis brands in different segments of the market, it has not yet demonstrated any competitive advantage with which to retain its market share. Therefore, it will be forced to spend significant amounts on marketing to make inroads in crowded major markets like Canada. Furthermore, it is not positioned to take advantage of cannabis legalization in the U.S. in any way, assuming it happens at all. In other words, its competitors could potentially soon grow rapidly outside of Canada while also crimping Aurora's growth at home.
So is this stock a buy now? For most investors, no, but for those who are highly tolerant of risk, and who like the idea of investing in a turnaround, it could be a good time to start thinking about starting a position.
