There’s no denying that marijuana is a great place to put your money if you’re looking to generate impressive returns over the next decade. The industry is growing rapidly and most believe the wave of legalization that has taken hold in Canada will eventually make its way to Europe and spread further across America.
However, every up-and-coming industry is bound to leave a few casualties in its wake and it can be tricky to work out who that’s going to be. In my opinion, Aurora Cannabis (NYSE:ACB) is one such company that looks likely to be left behind as the pot industry grows.
Don’t get me wrong, Aurora Cannabis stock has a lot going for itself. The Canadian firm is seen making its way to the top of the pack when it comes to peak annual output. ACB management says its annual output could reach 570,000 kilograms and analysts see the firm producing significantly more than that due to some of its most recent acquisitions.
Output is obviously a big part of what makes a successful cannabis firm, but unfortunately for ACB stock, it looks like the firm doesn’t have the rest of the puzzle pieces.
Aurora Stock Has Too Much Debt
Perhaps the biggest issue I take with Aurora Cannabis stock is the company’s overwhelming debt obligations. The industry is plagued with debt because its newness means securing a bank loan is tricky. However, growth requires funding that that’s led cannabis companies to raise money by issuing convertible debt. Earlier in January, ACB did just that to raise $345 million that management says will be used to help the company expand within Canada as well as internationally.
The trouble with these types of transactions is that they weigh on current shareholders because they have the potential to dilute the value of their shares.
While some financial wrangling is to be expected, Aurora Cannabis shareholders have had to be very understanding because the firm has been on a spending spree.
The company recently paid $175 million for Whistler Medical Marijuana and spent more than $2.5 billion last year when the firm acquired CanniMed Therapeutics, MedReleaf and ICC Labs. That kind of aggressive spending suggests that the firm is willing to make major sacrifices, on investors’ behalf, in order to grow.
Although the current state of affairs in the marijuana space requires riskier-than-normal funding options, that doesn’t mean that continuous spending is the answer. Perhaps if ACB was able to make strides using what its got before heading out to make another costly acquisition, I’d have more confidence, but so far the firm appears to be on a buying spree that it can’t support.
Plus, there’s some concern that the companies ACB is purchasing aren’t really worth their hefty price tags. As James Brumley put it earlier this year:
“[A]s time marches on, the industry’s M&A will be less and less compelling; the top names in any business tend to be snatched up first, or are locked up with exclusivity agreements. We may have already reached the point within the cannabis industry’s life where buyout options are thin, and unimpressive.”
Brumley believes Aurora Cannabis is fighting for “scraps” with its most recent acquisitions, and he may be right.
Aurora Doesn’t Have Big-Name Support
There’s another reason I’m hesitant about Aurora Cannabis stock- the firm has yet to pair up with a larger peer. We’ve seen big names like Molson Coors Brewing (NYSE:TAP), Altria (NYSE:MO) and Constellation Brands (NYSE:STZ) all ink deals with smaller marijuana companies in order to dip a toe into the marijuana market before it explodes in the U.S.
Why hasn’t anyone paired with ACB yet?
It would be in Aurora Cannabis’ best interest to get out there and buddy up with a larger beverage or snack-food company because it could give the firm a leg up when it comes to future growth prospects. Plus, it would eliminate some of the funding stress I mentioned above.
The fact that Aurora Cannabis has yet to find itself a brand-name suitor is worrying because it suggests the firm might be left out once the industry has consolidated and the winners emerge.
Bottom Line on ACB Stock
While any pure-marijuana play is risky right now, I believe Aurora Cannabis has a higher degree of risk than many of its peers. Management appears to be laser-focused on growth, which is creating blindspots like profitability and shareholder value.
That could become a problem when the industry shakes out, especially if Brumley is right and the consolidation within the pot industry is mostly over.
At the moment, the negatives outweigh the positives when it comes to Aurora Cannabis stock so I’ll be watching from the sidelines.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
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