Based in Edmonton, Canada, Aurora Cannabis Inc. (ACB) produces and distributes medical cannabis products worldwide. ACB’s stock has gained 96% over the past six months, driven by a surge in investors’ interest in cannabis stocks on optimism over cannabis’ legalization prospects in the United States. However, its shares have tumbled 5.2% so far this year and 24.5% over the past month.

ACB is currently trading at $7.88, nearly 60% below its 52-week high of $19.68, which indicates short-term bearishness. As the Biden administration continues to busily tackle  the pandemic-induced public health and economic crises, its plans to address marijuana decriminalization appear to have been placed on the backburner.

Consequently, investors have become concerned about ACB’s prospects because the company is far from profitable and is struggling to stay afloat. So, ACB’s recovery prospects look bleak now.

Here is what we think could influence ACB’s performance in the near term:

Industry Headwinds

Cannabis legalization has clearly been making big strides in the U.S. as more states accelerate their relaxation of marijuana law enforcement. However, given that the federal government is still prioritizing the health crisis, its plans to decriminalize or legalize marijuana at the federal level has taken a backseat. At the same time, since the Canadian market is still too small for cannabis companies to grow their revenues significantly, Canada-based cannabis operators like ACB might face great difficulty in generating profits in the crowded cannabis space.

Disappointing Financials

ACB’s consumer cannabis net revenue declined 16.8% sequentially to $28.57 million in the fiscal second quarter ended December 31, 2020. It reported an adjusted EBITDA of negative $16.80 million. The company’s gross profit before FV adjustments for consumer cannabis declined 68.5% sequentially to $2.89 million. Also,  ACB’s adjusted gross margin before FV adjustments for medical cannabis came in at 56%, compared to 59% in the third quarter ended September 30.

Weak Profitability

ACB’s trailing-12-month cash from operations came in at negative $220.85 million. The company’s ROE, ROA and ROTC margins are negative. Also, ACB’s trailing-12-month gross profit margin and levered free cash flow margin stood at negative 16.3% and 100.2%, respectively.

Unfavorable POWR Ratings

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 an F Quality Grade, given the stock’s lower profitability.

In terms of Sentiment Grade, ACB has an F, as seven of the 11 Wall Street analysts have rated the stock a ‘Sell.’

Also, it has a C grade for Momentum, which is consistent with the stock’s negative price returns year-to-date.

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

ACB is ranked #215 of 234 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

Although optimism around the potential large-scale legalization of cannabis in the United States has been boding well for most  cannabis stocks, not all are well positioned to capitalize on the tailwinds.

Given the stiff competition in the cannabis space and the potential delay in federal legalization in the United States, ACB’s lower profitability and inadequate financials might create hurdles in its growth path. Thus, we think the stock is best avoided now.

ACB shares were trading at $8.06 per share on Monday morning, up $0.18 (+2.28%). Year-to-date, ACB has declined -3.01%, versus a 11.46% 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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