Aurora Cannabis (ACB -0.15%) stock capped off yet another bad year in 2023, with its shares falling by more than 45%. But this isn't new for investors; Aurora has consistently been a bad buy. This marks the sixth consecutive year that Aurora's stock has fallen by at least 30%. It's a painful but important reminder to investors that just because a stock has declined significantly doesn't mean it's due for a recovery -- or can't fall still more.
For Aurora to turn things around for investors, it needs to be a more tenable investment. The good news is that it has been making strides in improving its bottom line. But will it be enough for Aurora to break its awful streak in 2024 and achieve positive returns for investors?
Why there's reason for hope
One of the things I like about Aurora Cannabis these days is that the company has been moving away from the consumer cannabis market, which is downright toxic in Canada, the company's home market. There's too much competition, which leads to abysmal gross profit margins for cannabis companies. It's a recipe for disaster, which is why many Canadian pot stocks struggle.
Aurora has been focusing on the medical marijuana market. The drawback there is it's a much smaller segment of the overall market, so the growth potential is more limited. But the margins are also better on medical products, and so it's no coincidence that as Aurora has been shifting toward medical marijuana, its financials have been improving.
In its most recent quarter ended Sept. 30, Aurora reported net revenue of 63.4 million Canadian dollars ($48 million). Medical marijuana net revenue totaled CA$43.8 million and represented just under 70% of the overall top line. Consumer cannabis net revenue of just under CA$12 million could soon be less than Aurora's plant propagation revenue, which totaled CA$7.2 million last quarter.
Aurora reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profit of CA$3.4 million for the period -- a record for the business. In 2024 it also projects that it will bring in positive free cash flow, or what's left of cash flow after capital expenditures and business investments.
Why Aurora stock could have trouble rising
It may be surprising that as Aurora's financials have been improving, the stock has continued to struggle. In the past, news of free cash flow and adjusted EBITDA profits may have sounded like a surefire strategy to win over investors. But with cannabis investors losing heavily on pot stocks in recent years and no progress on marijuana legalization in the U.S., the optimism has faded.
The problem for Aurora is that the one catalyst that could energize the industry revolves around U.S. legalization efforts. And with Aurora focused on international medical marijuana markets, it may miss out on a potential rally should investors become bullish in the future.
According to data from Statista, the global cannabis market is currently worth $51.3 billion. And Europe, the second-largest market outside of North America, was worth considerably less at $8.5 billion. By focusing its growth strategy on opportunities outside of North America, Aurora is limiting its growth potential.
Even with positive free cash flow, Aurora may not be able to win back investors. And with the company focusing on a much smaller segment of the market, it's not likely to generate the same level of excitement in the future.
Should you buy Aurora's stock in 2024?
Aurora isn't the captivating stock it was five years ago. The company needs to give investors a reason to be bullish on its prospects. It's great that the company's financials are improving, but free cash flow is supposed to help businesses grow. And Aurora's growth strategy centers around the smaller medical marijuana market.
Although Aurora's business appears to be in better shape in terms of cash flow and earnings, there's still no reason to get terribly excited about the stock right now. While the stock's losses may be smaller in 2024 -- or even recover a bit -- this still isn't an investment worth adding to your portfolio as it could continue to struggle for the foreseeable future.
