Headquartered in Edmonton, Canada, Aurora Cannabis Inc. (ACB - Get Rating) is a medical cannabis producer and distributor. ACB’s stock has gained only 6.9% over the past year. In fact, over the past three months it has declined 30.5%. Also, the stock is currently trading at $8.90, 54.8% below its $19.68 52-week high.

The company is expected to release its third quarter, fiscal year 2021 earnings report on May 13. ACB has missed  consensus earnings estimates in each of the trailing four quarters. As such, analysts have become bearish on its earnings prospects. Given that the company’s revenues have been negatively impacted by  Canada’s restriction of retail sales to curbside pickup, its attempts to achieve more robust  growth has yet to convince investors. 

Also, the budding cannabis industry has become crowded with new operators that are trying to grab market share from established players. Amid this environment, ACB’s failure to attain profitability and strong revenue growth could cause the stock to retreat  in the near term.

Click here to check out our new  Cannabis Industry Report for 2021

Here is what we think could influence ACB’s performance in the coming months:

Cannabis Industry Headwinds

While the cannabis legalization momentum in the United States is now stronger than ever and investors remain bullish about the prospects for federal legalization, given that there is still insufficient political support it is highly unlikely that there will be a full federal legalization in the near term. This means that Canadian cannabis operators like ACB that are still operating in a relatively smaller market and wish to legally expand their operations into the United States may not be able to grow their revenues and profitability significantly.

So,  intense competition, increased expenses and reduced product prices  remain a threat to ACB’s long-term growth. 

Weak Financials

ACB’s revenue from provision of services declined 59.4% year-over-year to$455, 147 in the fiscal second quarter, ended December 31, 2020. The company’s loss from operations came in at$39.3 million, while its net loss came in at $242.30 million. ACB reported a $1.44 loss per share of over this period. Also,  it reported an adjusted EBITDA of negative $13.9 million.

Low Profitability

The company’s negative 16.3% trailing-12-month gross profit margin is significantly lower than the 54.9% industry average. ACB’s ROE, ROA, and ROTC are negative 79.6%, 84.9% and 6.6%, respectively. Furthermore, its levered free cash flow margin is negative 100.2%. Also, its asset turnover ratio of 0.1% is 78.5% lower than the industry average of 0.4%.

Analysts’ Rating and Price Targets Reflect Downside

Of the three Wall Street analysts that have rated the stock, two rated it Strong Sell. Currently trading at $8.90, analysts expect the stock to hit $8.18 in the near term, which indicates a potential decline of 8.1%. The price targets range from a low of $7.5 to a high of $9.01.

POWR Ratings Reflect Bleak Prospects

ACB has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. ACB has a Quality Grade of F, given the stock’s weak profitability.

In terms of Value Grade, ACB has a D, in sync with the company’s 9.19x forward Price/Sales ratio, which is 22% higher than the 7.53x industry average.

Also, it has a C grade for Momentum, which is consistent with the stock’s negative price returns over the past three months.

Click here to see the additional POWR Ratings for ACB (Stability, Sentiment and Growth).

ACB is ranked #217 of 231 stocks in the F-rated Medical – Pharmaceuticals industry.

There are several top-rated stocks in the same industry. Click here to access them.

Bottom Line

Even though the large-scale legalization of cannabis in the United States has opened several opportunities for cannabis companies unless a full federal legalization happens ACB might not be able to capitalize on the tailwinds. Moreover, while its peers are ramping up production of cannabis derivatives, the company is still engaged in medical cannabis production. The stiff competition and ACB’s unprofitability remain causes for concern amid this scenario. So, we think it could be wise to avoid the stock now.

Click here to check out our new  Cannabis Industry Report for 2021

ACB shares were trading at $8.60 per share on Monday morning, down $0.30 (-3.37%). Year-to-date, ACB has gained 3.49%, versus a 13.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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