Earlier this week, Aurora Cannabis (NYSE:ACB) enjoyed a surge in momentum, leaping over 9% on Tuesday’s session. But without any fresh fundamental drivers, it was easy to pinpoint why Aurora Cannabis stock took off.
Cowen & Co analyst Vivien Azer initiated coverage of the company with an “outperform” rating. Moreover, she set a $14 price target for ACB stock, representing a 77% premium against current levels. Since shares are already up over 61%, such resounding bullishness raised eyebrows.
However, Azer wasn’t just spitting out numbers for the fun of it. Backing her thesis is Aurora’s “large cultivation footprint.” Key acquisitions, such as January’s Whistler Medical Marijuana buyout, will enable ACB to grow its domestic and international presence. Already, the company has 20% market share in its native Canada.
With continued advancements, Azer believes that ACB will deliver positive earnings by its fiscal fourth quarter in June. If so, Aurora Cannabis stock easily outshines rivals like Canopy Growth (NYSE:CGC) and Aphria (NYSE:APHA).
Given a prominent voice in the legal-marijuana space advocating for Aurora, it seems a no-brainer. However, ACB stock, like any other name in the industry, has suffered wild swings in market value. As a result, conservative investors have avoided marijuana stocks, especially with the major indices performing poorly in recent sessions.
In addition, rapid-fire growth has a dilutive effect. For instance, Aurora’s $175 million Whistler buyout was an all-equity one. When you look at the company’s other acquisitions, you’ll notice a similar trend. While such decisions save vital cash funds, they also negatively impact Aurora Cannabis stock.
If that wasn’t enough of a concern, shares fell a sizable 2.6% on Wednesday. Is this a warning to avoid ACB stock?
The Long Game Benefits Aurora Cannabis Stock
Given this contrasting perspective, Aurora has the appearance of a classic bull-trap: shares attract investors on superficial information, but the fine print ultimately upends them.
Indeed, when you drill into the granularity, Aurora Cannabis stock has “bad deal” written all over it. For example, Whistler has a production capacity of a little over 5,000 kilograms annually. That’s nothing when you compare it to ICC Labs, another Aurora buyout. ICC churns out a whopping 450,000 kilograms annually.
Aurora paid $290 million (in ACB stock) for ICC, while it paid $175 million for Whistler. Yes, the Whistler buyout is cheaper, but it’s yielding 1% of ICC’s production capacity. Has management started smoking their botanical inventory?
Actually, the Whistler deal is one of the smartest moves the company has made. It just requires a longer-term approach to appreciate it.
Here’s the situation with the legal-marijuana industry: we’re in the second leg of a multi-phase race. The first leg was the introductory period. This is where investments like Aurora Cannabis stock jumped higher simply because it exists in the cannabis space. Like I mentioned in prior stories, a previously illegal market found legality, naturally boosting investor sentiment.
But now that everyone and their dog competes in the cannabis space, pure production stats no longer provides differentiation. Don’t get me wrong: ACB stock clearly benefits from expansionary efforts. However, in the second leg, it’s not just about quantity, but rather quality.
What makes Whistler special? According to its PR profile, the company “commercialized more than 30 flower varieties and strain-specific oil products, from an extensive genetics bank of over 150 strains.”
This fact should actually be at the top of Aurora’s marketing campaign.
Patience Is Key for ACB Stock
Let’s consider what happens several years down the line. Based on shifting political sentiment towards progressivism, the federal government will likely de-schedule marijuana. When that happens, anybody that shops at Home Depot (NYSE:HD) can theoretically grow their own weed.
Under this environment, what incentivizes a pothead or a patient to fork over their money to a weed company? Surely, it’s not quantity nor accessibility, since growing marijuana isn’t brain surgery. What matters are strains and compounds that address specific symptoms, or induce a particular experience.
Through the Whistler acquisition, Aurora wins on the quality department. With its other capacity-friendly buyouts, ACB ensures that it can supply that demand.
Rather than being dilutive, the company’s shopping spree is actually accretive. You just have to extend your timeframe.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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