Facing a glut of legal product and a flood of illegal competition, Aurora Cannabis (NYSE:ACB) has spent the last several months cutting back.
Production capacity is now down to 100,000 kilograms per year. At the end of June, the company listed 316 million CAD in cash and short-term securities on its books, against long-term debt of almost 400 million CAD. A Canadian dollar is worth about 75 cents.
All clear, right? Not right.
Betting on the Short Term
As its first-quarter report noted, Aurora continues to buy other pot and pot-related companies, including producers in Europe and Uruguay. It continues to treat marijuana derivatives as medical treatments despite a shortage of legal evidence.
The company is betting that 2020 can be a better year. It’s betting it can cut its general expenses, which were one-third more than its sales last quarter, and turn a profit.
The argument has sold some analysts. Aurora remains one of the most-loved stocks on Robinhood, the stock-buying app beloved by young investors. Cantor Fitzgerald now has an “overweight” rating on the stock.
If you’ve ignored my warnings, it’s because you think the current numbers show a way up. Aurora opened for trade Jan. 22 at $2.03 per share, a market capitalization of over $2.2 billion, a little over 10 times revenue. But a small profit in the June quarter means there’s a trailing price-to-earnings ratio of 9.5, well below the market average.
To read the first-quarter financial report, Aurora learned hard lessons. But even in January it remains a buyer of weaker companies, acquiring medical marijuana producer Whistler for about 175 million CAD. Aurora insists Whistler has a history of profits and that it’s an “iconic brand.” What is the company smoking?
Aurora reminds me of Whiting Petroleum (NYSE:WLL), which once proclaimed itself the “King of the Bakken” after buying up other North Dakota oil producers during that state’s mid-decade boom. As recently as September 2018 Whiting was a $53 stock. It opened for trade Jan. 22 at $5.33, a market cap just under $500 million.
The question is whether cannabis shares oil’s fundamentals. The problem is you can’t tell the difference between legal and illegal pot. The primary motivation for making pot legal was to cut state legal costs, not make money for suits. That’s now how things worked with alcohol in the 1930s. Illegal liquor was poison. Today’s illegal pot isn’t more dangerous than the legal stuff.
The Bottom Line on ACB Stock
The danger for Aurora is the company still thinks marijuana, or components of it like CBD oil, can be some sort of wonder drug. It continues to spend on “international expansion” in markets where smoking pot will get you tossed in jail.
If you’re smoking to get high, or get through the pain of cancer treatments, go with my blessing. Beyond that it’s patent medicine, best avoided. The same goes for ACB stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.