Aurora Cannabis (ACB) reported earnings a few weeks ago and gave investors something to cheer about.
The company beat analyst expectations when it came to revenues generated and significantly reduced SG&A expenses on track to hit its aggressive goal of $40 million per quarter. As a result the stock ran from $5 to over $17 in just a few days.
Then the company also announced an all-stock acquisition of Reliva, a CBD retail chain in the United States. This caused further optimism for investors as this means that ACB will now be entering the US CBD market.
Since the rally due to the Reliva acquisition, ACB shares have fallen over 15%, as the overall market has been rising. Part of the reason is due to a dismal earnings report last week from the world’s largest cannabis producer Canopy Growth (CGC). This negative report dragged down the whole cannabis sector.
But there are other reasons…
ACB investors have faced the hard reality of dilution on multiple occasions. ACB will issue another 2.5 million shares for the purchase of Reliva. If shares of ACB continue to fall over the next few weeks the company might have to issue millions of additional shares to cover the $45 million contingent fee for the acquisition.
ACB is also still carrying more than $2 billion worth of goodwill on their balance sheet. We believe that ACB still may need to write-down $1 billion tied to Its MedReleaf acquisition.
However, there are reasons to be optimistic. For example, ACB carries a price-to-book value of around 0.5 which indicates that the stock is trading for less than what its current assets are worth. This is a good sign for value investors who are looking to pick up businesses that seem to be undervalued.
ACB will need to prove in coming quarters that they can consistently grow revenues while decreasing expenses. We believe ACB remains risky although it offers a high-risk investor a potential opportunity to capitalize on an extremely volatile stock.
(Disclosure: The author is long ACB)
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ACB shares . Year-to-date, ACB has declined -44.83%, versus a -2.44% 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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