Yesterday, the founder of GLJ Research, Gordon Johnson, announced that he was initiating coverage on Aurora Cannabis stock with a “sell” rating. He shockingly argued that “ACB’s equity holds no value.” He predicted that shares of Aurora Cannabis will become worthless by the end of 2021 and assigned it a two-year price target of $0.
It’s very bold for any financial analyst to initiate a sell rating with a zero dollar price target. So as multiple news outlets pushed this headline, shares of Aurora Cannabis sold-off, and closed the day near its 52-week lows.
We strongly disagree with Johnson and the more we look at his arguments, the more we think he is just desperate for attention.
Johnson’s zero-dollar justification is backed behind the fact that he thinks that Aurora Cannabis is running out of cash. In his note, he wrote, “Our view that ACB’s equity holds no value is driven by our work, which implies the company is facing a liquidity crunch that will, ultimately, risk its status as a going concern.”
However, during this past quarter Aurora Cannabis made strong efforts to raise cash and improve their balance sheet. The company added $160 million to its existing $200-million credit facility with The Bank of Montreal. This is backed by the company’s producing assets, although Johnson said the debt carries several restrictions that take effect on Sept. 30, 2020.
Johnson said,”Aurora’s balance sheet is stretched to its limit, and the company is quickly running out of cash”. He continued, “With roughly nine months to go before these covenants take effect, and our work pointing to continued operating losses for ACB, as well as new open market equity issuances under Aurora’s ATM program, and a further deterioration in Canadian cannabis industry fundamentals on tap, we see risk to Aurora’s ability to continue borrowing from BMO” as soon as June 2020.
Long term investors of Aurora Cannabis should be well aware of the companies issues surrounding dilution, and this is no doubt a real concern. What Johnson has failed to mention is the fact that Aurora Cannabis has an industry-leading production cost per gram that should prove to be valuable down the road, even if the Canadian market has experienced a massive bottleneck.
Owning shares of Aurora Cannabis undoubtedly carries risk, as many companies within the cannabis sector during these very uncertain times, but to set a price target of zero is just downright silly.
Therefore, we not only disagree with Johnson but we’re long term bullish on Aurora Cannabis and believe that the stocks has a lot more upside potential in 2020 for the following reasons:
- We don’t believe the largest Canadian banks will give up on one of the largest cannabis companies in Canada.
- The new cannabis 2.0 market sales should provide a nice bump in revenues for Aurora Cannabis going into 2020.
- The company will see increased revenues in 2020 from faster retail roll out across Canada. The Canadian cannabis market has been over-regulated in 2019 and has created a very negative environment for many companies trying to achieve profitability.
- Nelson Peltz remains a strategic advisor and although he has been silent in 2019, it could be a much different story in 2020. There is always the potential for a strategic partner or big investor to join Aurora Cannabis, which could solve all of their cash issues.
Also, it’s important to note that in all of the stocks Gordon Johnson covers, he has more than 75% sell ratings and he is only rated 1.5 out of 5 stars on Tipranks.com.
(Disclosure: The author owns shares of Aurora Cannabis)
ACB shares were trading at $2.20 per share on Wednesday afternoon, down $0.15 (-6.38%). Year-to-date, ACB has declined -55.65%, versus a 29.74% 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...
