U.S. Markets open in 2 hrs 17 mins

Aurora Cannabis Doubles Down on U.S. CBD Market

Theodore Kim

Aurora Cannabis (NYSE:ACB) is continuing to spread its bets across product lines and markets far and wide. With a market cap now standing at $5.9 billion, the Edmonton, Canada-based marijuana stock is the second-largest cannabis company in the sector just behind Canopy Growth (NYSE:CGC) of $9.25 billion.

Source: Shutterstock

On Monday, Aurora Cannabis announced that it completed its acquisition of Hempco Food and Fiber, a producer of hemp-based fiber and nutritional supplements such as CBD products. The aggressive move into the small but rapidly expanding CBD market will give Aurora a definite leg up into penetrating the U.S. market, where sales are starting to boom.

Despite news of the expansion, ACB stock closed down slightly and is now trading at $5.84, well off its 52-week high of $12.52.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Certainly, investors have cooled off to ACB stock since earlier this year with many believing it is still overvalued in comparison to Tilray (NASDAQ:TLRY) or Hexo (NYSE:HEXO). Yet, taking a long-term prospective, ACB may be a solid value play if it gets closer to its 52-week low of $4.58.

Here are three key reasons why ACB is a good long-term play:

Aurora Cannabis Has Rock-Bottom Production Costs

Aurora Cannabis has certainly been on an acquisition binge since it was first founded in 2006. The acquisition of Hempco was just the latest in a string of ACB stock acquiring more production assets, including the takeover last year of CanniMed Therapeutics for $1.1 billion as well as MedReleaf in a $3.2 billion.

In fact, since 2016 Aurora has closed on 18 strategic acquisitions across the entire cannabis production value chain. But now, it commands enormous scale, with operations in five continents, 25 countries and 15 global production facilities. By 2020, ACB stock will have put online a production capacity of 625,000 kgs per year. Eventually, Aurora Cannabis estimates that average production costs given their huge economies of scale will fall to be well below $1 per gram. The long-term winners of the pot stock market will likely be those producers who can implement scale in order to minimize production costs.

The U.S. CBD Market Is Already Alive and Kicking

The most important reason for ACB’s acquisition of Hempco may be the U.S. hemp market. After the U.S. legalized hemp last year, various CBD products from hemp are expected to pop up in drug stores from coast to coast.

CBD can be found in a wide range of healthcare products, including skin ointment, infused beverages and CBD oil. The U.S. CBD space is heating up, and many major retailers want to get into that market. This month, the grocery chain Kroger (NYSE:KR) announced it would start selling Charlotte Web’s (OTCMKTS:CWBHF) hemp products. In fact, Canopy Growth is investing about $150 million in building a hemp industrial park in New York state where CBD is already legalized acquired AgriNextUSA last March specifically to expand hemp production.

ACB Stock Owns the Supply Chain and Creates Brand Equity

ACB may be the leader among marijuana stocks in terms of focusing on the high end of the cannabis market in order to maximize average selling price. Aurora Cannabis stock invests heavily in research and development to create a marketable brand name and valuable intellectual property. Through global expansion, Aurora is is spending to buy its own distribution channels and establish leadership in key international markets. Size and ownership of distribution channels should allow ACB stock to focus on the highest margin products, notably branded medical marijuana.

The weeks ahead may certainly see choppy waters for ACB stock. But given its long-term fundamentals, size, scale and investment in brand equity, Aurora Cannabis stock will be a decent long-term value if it gets any cheaper.

As of writing, Theodore Kim does not have any position in the above-mentioned stocks. 

More From InvestorPlace

The post Aurora Cannabis Doubles Down on U.S. CBD Market appeared first on InvestorPlace.