Aurora Cannabis Stock $ACB is a very popular stock, especially with day traders. But, is it a good long-term investment? And, by consequence, for the day traders, would it be risky to trade $ACB stock? I’ve been following Aurora Cannabis stock $ACB for a number of years. They were once the darling of the cannabis world. They have automated facilities that move entire platforms loaded with cannabis to other rooms so no one ever actually walks into the grow facility. This minimizes the chances of a human bringing in bacteria that could harm, infect, infest, or kill off the cannabis plants. Aurora Cannabis has facilities that reap the benefits of some of the sunny cities in all of Canada by using solar panels. These panels provide enough power to keep minimize costs for growing cannabis. Electrical power is one of the biggest costs.
But, the dreams of cannabis domination did not pan out for Aurora, or for that matter a few of the other big names.
Mostly, I focus on long-term investments. And, my focus is primarily cannabis stocks only. I do a considerable amount of trading when the numbers make sense but, that is with crypto. I trade options on cryptocurrencies with a delta-neutral strategy where I boil every single thing down to a number without a care in the world as to what my thoughts are about up or down. I just want movement.
But, with cannabis, regardless of the position, it is important to understand the fundamentals of a company even if your longest position timeframe is one hour. If you have a fundamental understanding of a company’s financials then this may bring in an amount of sensibility. I hear numerous individuals stating that this stock is going up. I am always left wondering why they think that? What is it that is going to provide the catalyst to push the stock upwards? Revenue growth? Increased gross margins? Lower cost metrics?
Here is a look at Aurora Cannabis Chart $ACB over the past 1.5 years:
As you can see from both charts, there has been pressure.
Is Aurora Cannabis a Good Buy
Is Aurora Cannabis a good buy? I could sit here and try and elicit a sense of warm fuzzy feeling and say had you picked up $ACB just last week you would be up some 10% basis. But, did you? No. Neither did I. So, I’m not going to inflate your emotions. Instead, let us break down the company itself and try and see if it has value. If it does have value, then, yes, Aurora Cannabis is a good buy. If Aurora Cannabis does not have value then, no; it is not a good buy.
Revenue is moving higher but, Aurora has yet to eclipse a high from recent quarters back:
At first, it looked as if Aurora’s revenues would never stop growing on a quarterly basis. They were hitting sequentially bigger quarterly revenue numbers. However, all of a sudden, a lot of wholesale product hit the Canadian markets at the same time; there was a glut. Wholesale prices collapsed. So did demand for wholesale products. This affected a few of the major players. That was the end of 2018 into 2019. Cannabis stocks all collectively sold off. There was simply too much supply of low-quality cannabis. As it turns out, cannabis users are discriminating and are more likely to pay a premium for a quality product at any one period than a discount for low-grade weed. I don’t smoke cannabis. But, I could have easily told you that.
Take a look at the daily charts on a long-term view to get a better perspective:
The high was $160.00. The low is in the single digits. A lot of people lost a lot of money during this time period.
Without the anticipated growth in revenue, the selloff was inevitable.
If there is one thing that low-quality weed can provide it is low-quality margins:
There is a lot of work that goes into growing cannabis. First, one needs to start with a specific strain that has the qualities that a consumer would want. Actually growing the flower is not necessarily rocket science. There are quality aspects such as finishing the flowers in different colored lights. But, the real tedious work is actually trimming the flower. Trimming flower is a bit of an art itself. It is time-consuming and you are looking to get the most out of the flower. So, yield of high-quality cannabis is the goal. But, it is not necessarily an easy nor inexpensive goal to achieve.
With Aurora automating itself as much as it does, and with all of the solar panels involved, you would think that even with the lowest quality cannabis margins would be competitive. They are not. But, it is all relative. The smallish companies are producing very high-quality cannabis on a smaller scale. Margins for these smaller, more boutique companies are between 60% – 65%. So, Aurora is being out margined by the smaller players. As for other players such as Canopy Growth? As I said, it is all relative. Canopy’s margins are lower than Aurora’s. So, yay for relativity.
Total Operating costs have been heading lower, much due to the shift in company focus and changes in management.
Total operating costs are clearly being contained. In fact, they have been halved in just two quarters. Kudos to management.
But, as I stated before, everything is relative. While I feel there have been necessary downward cuts to total operating costs, relative to total revenue, the costs are far from enough:
Whereas gross margins are a percentage of the total revenues minus the costs to produce the product, total operating efficiencies deal with running the business behind the scenes. For the uninitiated, within total operating costs are SG&A. This is Sales, General & Administrative. These are all of the costs of the back office workings such. The two metrics are crucial to a business.
we take a look at total operating costs and divide by total revenue. The number is a percentage. The ideal percentage is roughly 30% – 35%. In order for Aurora to be competitive in that metric, given the costs to run the business, revenues would have to be $150M quarterly. That seems like a long shot at this point, but doable within the industry.
EBITDA is the next thing we look at as we move down a financial statement; EBITDA being Earnings Before Interest, Tax, Deductions/Depreciation/ Amortization:
Positive EBITDA is an important metric to hit. What this number shows is if the venture is promising. Generally, there are revenues and the cost of goods to generate those revenues with gross profits being what is left over. Then, there are the costs of running the business (The SG&A Mentioned above). The quick and the dirty is that what is left over after deducting the costs of goods and total operating costs (Less a few other minor things here and there) is EBITDA.
As it turns out, Aurora is not too terribly off the mark with the business model. Then again, they are not too terribly close, either. EBITDA loss was -$23M off of $50M. That is about 50%. Go back up to total operating costs and you can see where a big chunk of the loss lies. At the same time, keeping more of what they sell would go a long way by somehow improving gross margins. But, for me, the lion’s share of the loss is driven by the weight of total operating costs.
After EBITDA, other deductions are taken out and what is left over is net earnings:
This is where it hurts the most. Deductions from retooling the business and other losses brought total net earnings down a whopping -$230M for Aurora. I can see these losses declining significantly as management has been retooling the business model and boarding up or some of the grow facilities. That is where we see the costs of these… and the losses.
A commenter asked that I start including a balance sheet analysis on these companies. Not a bad idea. I have been focusing on building up the infrastructure of the website since its launch on March 1st. This has contributed to me minimizing some of the content I have been putting into the analysis simply because of the time. But, I am way past the hump on putting together the foundation of the site and, at the same time a lot of the companies are hitting EBITDA and therefore it may be time to start showing a depth of other parts of a company.
All of my analysis on each stock will now be updated with the Balance Sheet. The eventuality will be that as time goes you’ll find this data on my site more and more for each company.
You can see the progression of the losses that Aurora had taken and the steps to stop the hemorrhaging by selling off assets:
Despite the drop from the previous quarters, Aurora has started to add in some assets to its foundation. This is a hopeful sign that there are now positive developments. But, that is not a factor of Aurora generating value via organic growth; they are not capable right now. Instead, cash infusions were the result:
There was a cash raise earlier in the year… and that pressured the stock with share dilution. As it turns out, there is not enough cash on hand to weather another quarter of what they just had with net earnings.
Liabilities are in check but, trending slightly upwards:
I do not see any real issues with either the assets or liabilities right now for Aurora. I show this merely to progress towards the next layer, the Book Value Per Share.
Book Value Per Share
Book value per share and total equity mirror each other, although not dollar-for-dollar:
As a value investor, I want to know that there is something behind an investment… some tangible assets. Book value shows what the firesale price of a stock could be; if management took all assets and sold them off and distributed them to the shareholders.
The current stock price is $8.95 as I write this. With a book value roughly about the same price, this could give someone something to lean on as a worst-case scenario for investing in the stock. But, that would not be a panacea.
First, look at cash on hand. Aurora cannot afford another quarter where they have another 9-figure write-down like they just posted. That would mean having to go back to the cash register and issue more stock, which would mean further dilution and further selling of the stock, just as what happened in January.
My best guess? Aurora management is already looking to raise more cash: Look for more dilution.
For now, the stock is on par with value.
A potential opportunity for Aurora?
Time is money. That is the bottom line. Personally, I would not waste my time with Aurora because there are other opportunities to get involved in other stocks that may yield better results… for right now.
But, you have to imagine that Aurora cannot really hit too much lower of a bottom. But, they may very well need to go back to the cash machine and raise more money very soon. I see this happening before the year’s end, actually. They could also sell off some more assets that are not performing, which could add some cash and profits to the bottom line in an obtuse move outside of normal business mode.
Total operating costs are a telling sign that they still need to cut costs on a large scale. Aurora is simply not garnering enough revenue to maintain its operations. Then, they also need to do something about pushing for a far more premium product that could add to gross margins. There has been a general shift but, I am not sure that the shift has finished occurring just yet.
The allure of trading Aurora
I can see the deep volume being an attractive component to trading Aurora. And, I could argue the case for Aurora being at the absolute bottom of the down move. But, I will keep reiterating this one thing: Time is money. Holding on to a long-term position right now has some benefits but, not enough. There are other opportunities that would grow an account at a much faster rate.
If your thing is quick in-and-out trades, understanding the foundation of where this stock sits is important. Eventually, $ACB may pull out of the bottom. For now, there are too many arguments in both directions to make $ACB a reliable buy.
I am genuinely neutral on Aurora at this time.
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