It’s been a tough couple of years for Aurora Cannabis (ACB) investors. The stock has fallen over 85%, from all-time highs hit in 2018, to trade just at about $1.65 on the NYSE.
In addition to industry wide challenges, such as Ontario’s inability to license dispensaries and the resilient black-market, much of the blame for Aurora Cannabis’ disappointing performance rests on the shoulders of its management.
As a result, there have been management changes recently, most notably CCO Cam Battley and CEO Terry Booth have left the company. They were blamed for their careless spending and ongoing dilution, which has been a big concern for shareholders. Under their leadership, the company went on an acquisition spree that tallied up over 3 billion dollars worth of goodwill along with no major equity partner.
Yet, Aurora Cannabis now has a new interim CEO, Michael Singer, and the company disposed of roughly 1 billion dollars worth of goodwill last quarter which helps their balance sheet.
So what’s next for the company? We believe that there are four reasons why Aurora Cannabis could see a major turn-around, in the near future. Let’s take a look:
1) First off we believe that the market is vastly discrediting Aurora Cannabis and despite their issues, the company still has a shot at being one of the industry leaders in the cannabis sector. Aurora Cannabis has announced that they will be working with the UFC to develop a product lineup for the health and fitness industry called Roar Sports. Aurora Cannabis also recently launched a website called Aurora Hemp. Aurora Hemp brings together the cultivars, strategic partners, brands, and distribution networks to service medical, consumer, and wellness markets and further advances Aurora’s entry into the US hemp food and hemp-derived CBD markets. This could be part of Aurora Cannabis’s long term plan that they are currently unveiling.
2) The company is on the hunt for a new CEO to lead the company. One analyst Pablo Zuanic at Cantor Fitzgerald says that the stock could rally in a hurry with the right CEO. If Aurora Cannabis can appoint a new CEO who is strict with spending, focuses on profitability and execution, Aurora Cannabis could turn around in no time. We saw what happened to Canopy Growth after Bruce Linton was fired and replaced by David Klien from Constellation Brands. The company made a 360 this past quarter recording a huge revenue jump and shrinking losses. We feel that with a new CEO Aurora Cannabis could inevitably double on this news along with all long term factors aside.
3) Expectations have hit rock bottom. Interim CEO Michael Singer commented on the most recent quarter stating that he feels things will not get any worse. Aurora Cannabis is expecting almost no growth over the next quarter which could (if things go well) lead to an earnings beat. With expectations lower than they have ever been, any signs of improvement should cause the stock to rally.
4) Finally, we have the potential for Nelson Peltz to bring a strategic partner to the table. With valuations at the lowest level they’ve been in years Aurora Cannabis is most likely on the radar for big industry players looking to take a leap into the cannabis sector. Although we don’t think at these levels it would be wise for Aurora Cannabis to accept a big investment, we feel that it still remains a possibility and would almost surely drive the stock up much higher than current prices. Our only concern with this scenario is the fact that it would most likely hinder long term growth potential Aurora Cannabis has by remaining 100% independent.
There’s no question that Aurora Cannabis is in a challenging spot right now. However, the company is in the process of restructuring and cutting costs in a push towards profitability. The market has punished the company for its mistakes but we believe that the stock is oversold. Aurora Cannabis trades at just 7.8 times sales and 0.64 times book value, which is extremely cheap, especially for a company that still has a shot to be an industry leader one day.
(Disclosure: The author is long on Aurora Cannabis)
ACB shares were trading at $1.64 per share on Tuesday afternoon, up $0.06 (+3.80%). Year-to-date, ACB has declined -24.07%, versus a 4.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Aaron Missere
Aaron is an experienced investor who is also the CEO of Departures Capital. His primary focus is on the cannabis industry. He also hosts a weekly show on YouTube about marijuana stocks. Learn more about Aaron’s background, along with links to his most recent articles. More...
