Aurora Cannabis (ACB -0.15%) shareholders have been on a wild ride, and there just might be more in store. Over the last six months, the stock catapulted up more than 60%, only to crash and lose 18% for the period.
Now, the question is whether investors should expect another rocket flight, another crash, or something else altogether. Let's hear one argument from the bulls, and one from the bears, to hash out this issue.
What the bulls are saying
After a years-long battle against its operational inefficiencies fought amid the collapse of the Canadian marijuana market, the bulls are right to argue that Aurora's worst times are almost certainly in the past. In its fiscal second quarter of 2024 ended Sept. 30, it reported positive operating income of around 2 million Canadian dollars ($1.5 million) after registering CA$63 million in sales. Before Q2, it last had positive operating income in 2016.
Management is quick to point to the fact that the company's progress in reducing its expenses has been immense, claiming a sum of CA$400 million in annual cost savings over the last three years. It's true that a lot of those cost reductions were won by scaling down and selling off its marijuana production facilities, but it can probably scale back up gradually if it's necessary.
An additional CA$40 million in savings are on the docket for the rest of its 2024 fiscal year. If that happens, it will create the conditions for Aurora to be consistently profitable. The company's goal is to start generating free cash flow (FCF), or what's left from cash flow after business investments and capital expenditures, before the end of 2024, which looks realistic. And in case it isn't obvious, going from burning cash to generating cash is bullish for share prices.
The bull thesis also points to the inexpensive valuation of Aurora's shares. Its price-to-book (P/B) ratio is a scant 0.6. At such a low valuation multiple, there's a significant probability that the market is not assigning an appropriate value to its assets. For a deeply unprofitable business that's burning money, the valuation would fit like a glove, but that doesn't accurately describe Aurora any more. Bulls hope that the market will eventually notice and update its outlook, driving share prices higher in the process.
The bears are worth listening to
The bears don't need to dispute any element of the bull thesis to make their case. Instead, they merely need to point to the fact that Aurora's quarterly revenue only grew by 15% over the past five years. In that same period, its shares dropped by more than 99%.
To bears, the idea of this company becoming profitable and throwing off cash is not a compelling reason to invest. Realizing cost savings and operational efficiencies are not a substitute for robust top-line growth, which it does not have. Nor is there much reason to believe that will change. On average, Wall Street analysts expect Aurora's annual revenue to rise by less than 10% in its 2025 fiscal year. Due to the still-sluggish Canadian marijuana market, even that amount of growth might be a struggle to attain.
Another critical issue is the lack of a proven competitive advantage. With no way to retain its market share in the face of competition, there is nothing stopping another player from undercutting its pricing, setting off a race to the bottom that's sure to squeeze margins. There aren't necessarily any public cannabis businesses capable of doing this, but it's still an argument for investing elsewhere.
Finally, in the eyes of the bears, Aurora's discounted valuation is a sign that its shares aren't worth owning, rather than being an opportunity to own them on the cheap.
Who's right?
At the moment, the bear case is more compelling, though that might change over the coming quarters. If you're looking for a growth stock, this isn't it, at least not until it demonstrates that it can actually increase its sales at a faster-than-average pace instead of a slower-than-average pace. It's also not a great option for bargain-seeking investors because there are lower-risk stocks out there for marginally higher valuations.
There is, however, a solid chance that over the next 18 months Aurora will make a turnaround in which it transitions to slowly growing after becoming durably profitable. Under those conditions, the super cheap valuation of its shares will likely be temporary. But even so, the chances are good that a typical blue chip stock would grow faster and be a better investment, despite its shares being pricier.
