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Sure, ACB Stock Is a Falling Knife, but It’s Too Risky to Go Short

Thomas Niel

Aurora Cannabis (NYSE:ACB) stock continues to tumble. Shares have fallen from around $6 in early September to $3.68 at the close Oct. 11. Terrible results from its competitors have impacted ACB stock.

Sure ACB Stock Is a Falling Knife, but It's Too Risky to Go Short

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Hexo’s (NYSE:HEXO) preliminary results could be the canary in the coalmine. The cannabisphere is waiting on December’s rollout of derivative products to provide a sales boost. But what happens if this too is a bust?

With this in mind, it’s easy to say Aurora stock could fall further. Valuation remains high. But a speckle of good news could shoot shares higher. Let’s take a closer look, and see what’s the call on ACB stock today.

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Recent News with ACB Stock

After the Hexo report, analysts are taking a harder look at the pot industry’s future prospects. But Jeffries’ Owen Bennett remains positive on the stock. Bennett sees Aurora as one of the stronger cannabis companies, likely to survive the maelstrom.

Their strategic relationship with investor Nelson Peltz remains a key positive. The potential of them entering the U.S. market remains a catalyst to drive shares higher.

Bennett’s key concern is the upcoming convertible debt maturity. $230 Canadian million dollars worth of notes come due in March 2020. Given that the current share price is far below the conversion price, Aurora needs to raise more capital to retire the debt. In other words, the potential for more share dilution. While this dilution may not be material, is remains another negative for Aurora Cannabis stock.

Another key question on investor’s minds is “positive EBITDA.” Aurora previously implied they were are on target to hit this milestone by Q4 FY19 (quarter ending June 30, 2019). But they backtracked this before releasing Q4 results. Their current preferred wording is “on track”, without a defined date.

Aurora management continued with this on the last conference call, dancing around a target date for positive EBITDA.

Analyst consensus sees revenue rising from $438.3 million for the period ending Jun 2020 to $775.2 million for the period ending Jun 2021, but with excess inventory and falling average selling prices, is this achievable?

Aurora’s Upside Remains Priced In

ACB stock continues to sell at a high valuation. Aurora stock trades at an enterprise value/sales (EV/Sales) ratio of 21.3. This is a discount to peer Canopy Growth (NYSE:CGC), which trades at an EV/Sales of 28.1. But Aurora trades at a substantial premium to pot stocks like Aphria (NYSE:APHA). Aphria’s EV/Sales is 6.5. Aurora trades in line with Hexo’s current valuation (EV/Sales of 21.9).

Aurora’s potential growth is already priced into the share price. Even with shares trading below the $4 price level, ACB stock is no bargain. With skepticism over pot industry growth, could Aurora Cannabis stock fall further? The company next releases results in mid-November.

Last quarter, the company narrowly missed revenue estimates ($75 million actual vs. $78.2 million projected). For this quarter, sales are estimated to be $79.4 million. If the company misses the mark again, there will be concrete doubts over the Aurora growth story.

But what kinds of catalysts are in the pipeline? In prior analysis, I highlighted the company’s European business. As seen from September’s investor presentation, Aurora’s big presence in Germany could pay off in the long-term. But, for now, European medical sales remain a small part of Aurora’s business. European sales were just CAD$11.8 million out of  CAD$281 million in total FY2019 sales.

In the short-term, “Cannabis 2.0” is the biggest mover of Aurora stock. Canada is on track to allow sales of products like edibles in December. It remains to be seen if sales will meet expectations, or become another disappointment. Taking into account these potential catalysts, it appears that Aurora stock offers very little for investors.

Bottom Line on ACB Stock

I am skeptical about Aurora’s future prospects. The company stands at the cusp of opportunity. But so do scores of other publicly-traded pot stocks. The Canadian pot space got ahead of itself, ramping up production to levels that exceed demand.

The roll-out of edibles and other derivative products could be a saving grace, but reality may not line up with expectations. At the current trading price, Aurora stock is far too expensive to justify a position.

At the same time, Aurora is too risky a stock to short. A modicum of good news could send the depressed stock price higher. Aurora is the kind of stock you need to throw into the “too hard” pile. Look for clearer growth opportunities, and steer clear of ACB stock.

As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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