Since Aurora Cannabis (ACB) announced its most recent earnings, the stock has been moving lower. Shares of the Canadian cannabis producer have lost almost 50% of their value in just a few weeks.
A couple of days ago, the company added more kindle to the fire by revealing it has been burning through its cash faster than it had anticipated and will need to raise an additional $500 million over the next 25 months.
Management said in a press release on Tuesday that it only had $272 million left in proceeds from its at-the-market (ATM) program. This means that the company has used what was left of the $183M equity facility in the last 30 days. Now the company is proposing to sell $500 million of common shares, preferred shares, warrants, subscription receipts and debt securities.
Pablo Zuanic, an analyst at Cantor Fitzgerald who had previously remained optimistic on ACB despite their ongoing struggles, cut his estimates. Zuanic lowered his 12-month price target on ACB to just $7 from a staggering $18. He also reduced his rating from “overweight” to “neutral” while calling the news on Tuesday “contrary to expectations and guidance.”
I was surprised Zuanic kept his overweight rating over the past month, as ACB announced a string of bad news which included the departure of Nelson Peltz. Zuanic stated that the downgrade was long overdue.
Owen Bennett, an analyst from Jefferies, said, “It’s unsurprising the company is looking to raise funds.” He also stated that, “Even if Aurora hit its latest target of achieving positive EBITDA in fiscal 2021, the company was at risk of under-investing in the business without raising additional funds.”
Bennet noted on Monday that, “What is surprising is the size of the possible raise and the dilution that comes with this. Exhaustion of the ATM would have already represented [approximately] 26 percent dilution, while full use of the US$500 million would be an additional [approximately] 50 percent based on the current share price.”
These figures are very hard to stomach for investors who have stuck with the company for so long knowing that they could face another potential 50% downside. Many retail investors are down substantially on their position in ACB, which has created a series of class-action lawsuits against the company in recent months.
Bennet went on to voice his opinion on how ACB should position themselves, “It needs to establish a strong CBD business, and U.S. infrastructure, ahead of this, and then be prepared to invest in cannabis if any laws change. With most institutional money likely to be focused on U.S. names should we see legalization, if Canadian names can’t argue a strong case for competitiveness, they may struggle to catch a bid.”
At this point, I believe that ACB needs to focus on profitability and continue to cut SG&A expenses. If the company can continue to strengthen its balance sheet and prove to investors that they can generate consistent revenues, the stock might have a chance at stabilizing.
However, as the situation stands right now, ACB remains a high risk investment in my opinion and investors may want to watch from the sidelines for the time being.
(Disclosure: The author is long ACB)
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ACB shares rose $0.09 (+2.35%) in premarket trading Thursday. Year-to-date, ACB has declined -85.22%, versus a 2.95% 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...
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