Aurora Cannabis (NYSE:ACB) stock has slowly cratered this year. Shares have fallen from a 52-week high of $10.32 on March 19 to $3.73 at the close Nov. 6. High hopes for the “cannabisphere” have not lived up to expectations.
Despite oversupply, Aurora plans to ramp up production more than 3-fold to 500,000 kilos/year. Yet this is much more pot than the market can bear. With continued operating losses, the road to profitability seems miles away. But with the stock price bottoming out, we are getting closer to a reasonable price for ACB stock.
With the next earnings release expected next week, is now the time to take a position? Not so fast! Aurora Cannabis stock has fallen far, but additional downside could be on the table.
Headwinds Continue to Plague ACB Stock
Heading into earnings, Aurora Cannabis stock faces many issues. Cowen’s Vivien Azer is bearish on upcoming results. She believes a bulk of last quarter sales were a one-time event. Last quarter, Aurora sold C$20 million worth of pot into the wholesale market. Assuming this event is not repeated, she anticipates sales to fall 24% quarter-over-quarter.
Azer is also concerned with the company’s convertible debt due in March. In prior analysis, I have discussed Aurora’s convertible debt issue. The current share price is far below the conversion price. Because of this, the company will need to find alternative ways to refinance the debt. Aurora could issue new convertible notes. They could also raise equity. Either situation will be dilutive for ACB stock.
Analyst consensus for future revenue is also falling. Previously, Seeking Alpha analysts estimated sales of $775.2 million for the fiscal year ending Jun 2021. This has since fallen to $652.7 million.
But this could be darkness before the dawn. Next month is the start of “Cannabis 2.0,” when marijuana products such as edibles and beverages hit Canadian shelves. The rollout of these high-margin products could be a saving grace for the pot space.
Will “Cannabis 2.0” move the needle for ACB stock? Unlike peers such as Hexo (NYSE:HEXO), Aurora is not as tied to the recreational space. Their efforts have been focused on the prosaic medicinal end of the business. This has allowed them to diversify globally. As InvestorPlace’s Tom Taulli recently wrote, Aurora has made big inroads in Europe and Latin America.
Building a business in more regulated medical marijuana may not be as sexy as a cannabis-infused drink. But long-term, it may provide the company with stability to withstand Darwinian competition in the pot game.
Aurora Stock Cheaper Than Peers (But It’s No Bargain)
Using the enterprise value/sales (EV/Sales) metric, ACB stock is cheaper than many of its pot stock peers. Aurora trades at a trailing twelve-month EV/Sales of 25.37. In comparison, Canopy Growth (NYSE:CGC) trades at a current EV/Sales ratio of 18.63. Pot stocks like Aphria (NYSE:APHA) trade at much lower valuations (EV/Sales of 4.6). But Aurora Cannabis stock remains cheaper than Cronos Group (NASDAQ:CRON). CRON continues to trade at a high EV/Sales ratio (335.56).
For the pot stocks, trailing EV/Sales may not be the best metric. Applying EV/Sales to estimated FY21 revenue gives us a EV/Sales valuation of 6.3. Canopy’s future EV/Sales ratio (using FY21 estimates) is 7.7. This also demonstrates the market giving ACB stock a discount relative to peers like CGC.
But using forward sales is not an exact science. With revenue estimates continuing to fall, it’s tough to see where Aurora and its peers will be a year from now.
On an absolute basis, Aurora Cannabis stock is expensive. Recently, InvestorPlace’s Will Healy compared Aurora’s price-to-sales (Price/Sales) ratio to that of the S&P 500. According to Healy, the average Price/Sales ratio for the S&P 500 is 2.2. By comparison, Aurora trades for 20 times current revenue.
This premium is unsustainable. With the pot industry troubles, I am doubtful ACB stock will “grow into its valuation.” Shares have more downside from here, even if projected growth continues.
Bottom Line: Wait For Cannabis 2.0 to Play Out
It’s tough to predict short-term moves in the pot space. Most of the current news is priced into shares. ACB stock is no exception. Investors understand the company’s headwinds, and have acted accordingly. But in the next few months, the industry’s prospects could change.
If Cannabis 2.0 turns out to be the gold mine it has been touted as, Aurora Cannabis should reap some benefit. While not as levered to edibles and beverages as its peers, improved demand for legalized marijuana (in whatever shape or form) will quell fears of oversupply.
The fortunes of Aurora stock could turn on a dime, so don’t short this stock. Don’t buy it either, considering the murky waters in the short-term. Keep pot stocks like ACB on your radar, but take your time before making a move.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
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