On Sep. 11, earnings results from Alberta-based Aurora Cannabis (NYSE:ACB) stock took the center stage in the cannabis space. To the surprise of analysts, ACB stock posted disappointing earnings. Earlier in August, ACB stock has already decreased the forecast. So when Aurora Cannabis stock missed the diminished expectations, investors were not forgiving.
For cannabis investors, ACB stock needs little introduction. At present, Aurora Cannabis is Canada’s largest producer of cannabis, which gives the company certain economies of scale. Especially in its early days, Aurora Cannabis stock was a can’t-miss for investors. Yet since March, it has come off a long way from peak performance.
The ACB stock price is now hovering around $5.90, close to January’s lows in the $5 range. Understandably, investors are wondering what may be next for ACB stock given the recent decline in the price. Let’s look at the company’s fundamentals, industry developments, as well as the stock price.
ACB Stock’s Q4 Results Failed to Impress
When it released Q4 results for the fiscal year ended June 30, Aurora Cannabis stock missed revenue expectations. ACB stock’s net loss came at C$2.26 million on net revenue of C$98.94 million, with an adjusted EBITDA loss of C$11.7 million (or $8.9 million).
Analysts had estimated revenue of C$108 million. In Q4 last year, Aurora stock had reported net income of C$79.9 million, on net revenue of C$19.1 million.
ACB stock’s disappointing earnings follow several other poor results from large Canadian cannabis companies. And not everyone is convinced that Canadian recreational pot sales will remain strong.
Most pot stocks are burning through loads of cash and losing money like there’s no tomorrow. Cash flows are far from predictable. Investors are concerned that the initial hype surrounding the industry could be decreasing further.
It is likely that the rich valuations in this commodity-based consumer market may take a further hit in the coming months. The recent price weakness in most pot stocks including ACB has improved relative valuations, but these stocks aren’t cheap.
Headwinds That May Affect Aurora Cannabis Stock
It is important to remember that weed is an agricultural commodity. In late 2018, during the early weeks following legalization, Canadians spent about $40 million on legal weed. However, since then sales haven’t really held up. Instead the figures have come in much less robust than initially anticipated.
In other words, there are possibly too many players in Canada, a relatively small market. Annual Canadian sales are not likely to exceed $4 billion. In the legal retail market there is an oversupply. And as the largest producer, Aurora Cannabis is likely to have a major supply in its inventory.
On the other hand, the black market is still thriving in Canada. Thus, how can a producer like Aurora Cannabis maintain high margins in an industry that does not have meaningful growth potential?
No one knows when (or if) federal legalization will happen in the U.S. And other international sales outside these two countries are not big enough to act as a substantial catalyst for the share price of ACB as well as other pot stocks.
Could consolidation be a way forward for most of these cannabis producers like Aurora stock?
Could Canadian Legalization 2.0 Help ACB Stock?
In Canada, pot edibles and beverages will become legal on Oct. 17, one year from the original legalization of cannabis in the country. Industry watchers are referring to this new era in Canadian pot markets as “Legalization 2.0.”
New products are not expected to hit shelves till Dec. 16 as license holders will have to give Health Canada 60 days notice if they intend to sell them. Upcoming Canadian regulations will strictly limit what types of consumables can be produced and marketed. For example, manufacturers cannot legally combine pot and alcohol in products.
In some ways, this significant legal development feels like déjà-vu. Many industry watchers regard the legalization of edibles and beverages as another another significant milestone for pot companies. So what does that mean for ACB stock?
Around this time last year, Canadian cannabis stocks had started rallying in anticipation of the nationwide adult-use legalization. For example in mid-August, 2018, Aurora Cannabis stock touched a low of $4.05. By mid-October, ACB stock saw a high of $12.53.
Therefore, the hype surrounding the launch of pot edibles and drinks in Canada is likely to give a bit of fizz to ACB stock in the coming weeks, too. However I don’t expect as big of a jump this September.
In other words, it might become a classic case of “buy the rumor; sell the news.”
The Bottom Line on ACB Stock
In the coming weeks, I expect ACB stock to trade between $5 and $7. From a valuation standpoint, the stock is not necessarily a bargain at $5. However, I expect the second stage of legalization in Canada to give a boost to most pot stocks.
For Aurora stock, $7 level would be likely to act as strong resistance. Only after the stock is able to push through and stay above $7 can Aurora shareholders begin to relax for the longer-term prospects.
The cannabis industry remains speculative at best. Yet there may still be an opportunity for those with a high risk tolerance. Given the new steps in legalization in Canada, this quarter might be an opportune time to start a position ACB stock.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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