Aurora Cannabis (NYSE:ACB) continues on the path to decline. Now trading just under $2.30 per share, it trades close to its 52-week low. As losses mount and a cash crunch looms, conditions will probably get worse before they get better.
Despite its problems, the company has viable options to raise cash. Moreover, if its medical business continues to grow, I see an eventual recovery for Aurora after its blood in the greenhouse moment.
The Troubles Continue for Aurora
In early November, I told Aurora Cannabis investors to brace for more declines and eventually a reverse split. I pointed out that the hype in marijuana stocks may continue to fade. I also warned that Aurora stock could face a reverse split.
Since I made that call, it has lost nearly 40% of its value in a six-week time span. It also trades for less than $2.30 per share. Once it falls below $1 per share, the New York Stock Exchange will require a reverse split if it wants to continue trading on the exchange.
Unfortunately for Aurora Cannabis, little has changed for the company other than the stock price. Moreover, strategic errors from the past continue to haunt the company.
For one, it did not ally with a large alcohol or tobacco company comparable to the Constellation Brands (NYSE:STZ) investment in Canopy Growth (NYSE:CGC). Also, it went all-in on production capacity. Though it became the world’s largest marijuana producer, this does not help Aurora when the market faces a massive oversupply of dried cannabis.
Furthermore, it does not earn profits like Aphria (NYSE:APHA), which made the same bet on production capacity. It has instead depended on massive dilution. As late as June 2017, only about 27.9 million shares of Aurora traded. Today, that number is 1.05 billion.
Aurora Cannabis currently holds about 191.93 million CAD ($146.32 million) in cash. This will only keep the company afloat for two more quarters.
However, It Can Avoid Bankruptcy
Despite the bleak outlook, I do see a scenario where it can at least keep its doors open. For now, more debt issuance is probably an option. It currently holds over 395.15 million CAD ($301.25 million) in long-term debt against 4.39 billion CAD ($3.34 billion) in equity.
Furthermore, despite its pain, Wall Street believes the company will grow its revenues by 63% in the current 2020 fiscal year and by 86.3% in 2021. This gives creditors a reason to believe it can help the company through its cash crunch and get paid back in full at a later time.
Aurora Cannabis could also sell off some of its production capacity. Still, with the market’s massive supply glut, these assets will likely sell at a discounted price. Also, Vince Martin stated that its medical cannabis business serves close to 90,000 patients across the world. This could help Aurora as medical marijuana laws are permissive in comparison to those for recreational weed.
In the meantime, it will have to raise more cash. Hence, I still think we will see the share price below $1 per share, prompting a reverse split for Aurora. Because I see no reason why investors should stick around for this pain, I would recommend they get out for now.
The Bottom Line on Aurora Cannabis
Aurora Cannabis can recover, but not before we see blood in its greenhouses. Currently, the company holds enough cash to stay in business for only about two more quarters. Moreover, between massive dilution and its low share price, a reverse split for the company appears likely.
However, unlike most reverse splits, I do not think this one would necessarily turn into a precursor to bankruptcy. Thanks to low debt levels, it can probably find the capital to stay afloat.
Moreover, tremendous revenue growth and a robust medical cannabis business can serve the company well. Furthermore, despite the current supply glut, massive revenue growth and the liberalizing of marijuana laws across the world could make its production volumes an asset instead of a liability.
Still, this point for Aurora Cannabis will only come after a significant amount of further pain. Until it falls much further and executes a reverse split, I see little reason to hold this stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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