It’s been a bumpy ride for Aurora Cannabis (ACB) shareholders over the past two weeks. After Aurora Cannabis reported earnings the stock plunged and continued to drop substantially as further concerns over profitability and the state of the cannabis sector weighed on investor sentiment.
Just when we thought things couldn’t get any worse, the stock continued to move lower as investors agreed to convert 99% of their convertible debentures to shares as of November 25th. Aurora Cannabis announced Monday, November 25th that they received notice from holders of the Company’s CAD$230 million 5% unsecured convertible debentures that investors will agree to convert their debentures at the early amended conversion price of $3.2837. These debentures which are due March 9, 2020, represent $227,019,000 of the principal amount or roughly 99%. This caused the issuance of 69,135,117 Common Shares and sent Aurora Cannabis declining again to start off the week.
So is the worst over for shares of Aurora Cannabis? Or will the stock continue its move lower?
We believe that is a risky investment in the short-term. Historically, the average price-to-sales ratio for consumer packaged goods stocks is around 2.5. Presently, shares of Aurora Cannabis are trading at 12.8 times sales.
Also, Aurora Cannabis has been negatively impacted by Canada’s painfully slow rollout of retail locations. This is a major logistical issue that will likely persist well into 2020 and perhaps even into 2021.
However, Aurora Cannabis should be fine in the long-run. The company has well-established product portfolios and ever-expanding international footprints, and the U.S. should eventually legalize pot nationwide. And when it comes to having cash on their balance sheet, they should be fine, as they have stopped construction on two of their facilities which should save almost $200 million.
Despite the barrage of negativity being thrown around and disappointing quarterly results, we still see a bright future for the cannabis sector. Research firm New Frontier Data estimates that the legal cannabis market was worth $10.3 billion in 2018. Total legal sales of cannabis are projected to grow at 16% CAGR over the next six years, reaching $29 billion by 2025 in the United States alone and Aurora Cannabis is setting themselves up to be a diversified global leader in the cannabis sector with a presence in 25 countries around the globe.
Therefore, we suggest being an investor in Aurora Cannabis, not a short term trader. Investors have a longer investment horizon and can take on more risk, which is what’s needed at this time.
ACB shares were trading at $2.51 per share on Tuesday morning, down $0.01 (-0.40%). Year-to-date, ACB has declined -49.40%, versus a 27.32% 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...
