Earlier this week, GLJ Research analyst Gordon Johnson placed a sell rating on Aurora Cannabis' shares. Johnson also took the rare step of assigning a $0 target price for the stock. Essentially, he believes Aurora will fail and shareholders will lose the entirety of their investment.
"Our view that ACB's equity holds no value is driven by our work, which implies the company is facing a liquidity crunch that will, ultimately, risk its status as a going concern," Johnson said.
Johnson's view is predicated on his expectation that Aurora will face a liquidity crisis next year. He says the cannabis company's ongoing operating losses will make it difficult for it to continue borrowing from its banking partners. In turn, Aurora could run out of cash before it turns profitable.
"As the pace at which Aurora Cannabis is burning cash becomes clear to the market, barring additional resources from the capital markets, our work suggests the company will run out of cash before 7/1/20," Johnson said.
Earning its way out from under its heavy debt load won't be easy. A litany of issues have weighed on the cannabis industry and stifled its growth, including regulatory delays, slower-than-expected retail store openings, and lingering black market competition. Moreover, a supply glut in Canada is making Aurora's production leadership less meaningful, particularly now that it's been forced to delay bringing some of its new facilities online because of these supply overages.
Johnson also highlighted the risk that comes from Aurora's using its operating assets as collateral for its borrowings. In August, Aurora obtained $160 million Canadian in additional credit from a syndicate of lenders led by the Bank of Montreal, by using some of its assets as collateral. If Aurora can't pay back this debt, it could lose some of its key production facilities, which would exacerbate its problems and make it more difficult to reach profitability in the future.
A potential solution exists
Unlike some of its rivals, Aurora has been reluctant to sell a sizable equity stake to a larger business. Fellow Canadian cannabis producer Canopy Growth (NYSE:CGC) raised $4 billion by selling nearly 40% of its business to beer giant Constellation Brands (NYSE:STZ) (NYSE:STZ.B). Cronos Group (NASDAQ:CRON), meanwhile, raised $1.8 billion by selling a 45% stake to tobacco titan Altria (NYSE:MO). Aurora could potentially raise a significant amount of capital if it can find a company willing to make a similar deal, although the terms will likely not be as attractive now that it's waited so long to make a deal.
Some analysts are bullish on Aurora Cannabis
It should also be noted that not everyone agrees with Johnson. Out of the 19 analysts covering Aurora Cannabis' stock, 10 rate it a buy, seven rate it a hold, and only two have assigned sell ratings, according to The Wall Street Journal. The average analyst price target for Aurora's shares is $3.95 -- or about 75% higher than its current price.
Still, Aurora's shares are down 55% so far in 2019, and if Johnson's predictions prove accurate, more pain could lie ahead for investors.