Is Aurora Cannabis too cheap to pass up right now?
Some analysts have become more optimistic about the stock.
Aurora Cannabis (ACB -5.10%) is one of the most beaten-down cannabis stocks in the entire industry. Investors will recall that back in 2018, Aurora announced it was acquiring medical marijuana company MedReleaf for more than $2.5 billion in what at the time was the sector's largest deal. Today, Aurora is worth about one-fifth of that value, with a market cap of over $400 million.
The days of the company being among the industry leaders are long gone. Now, it's more of an underdog trying to get back to respectability. Having lost more than 98% of its value since the start of 2018, it's hard not to be bearish on Aurora. But has the stock finally reached a point where it could be considered a good buy?
Aurora recently received multiple upgrades
Analysts from Cantor Fitzgerald and Stifel Nicolaus upgraded their ratings on Aurora in June. One of the reasons was due to the company's opportunities in the legal market in Europe. One analyst, Pablo Zuanic, believes that since Aurora is one of the few companies in North America that have licenses to grow marijuana in Germany, it can benefit from the prospects in that market.
The government in Germany is looking at potentially legalizing marijuana and legislation could be ready this year. Germany is among the largest international cannabis markets in the world, with research company BDSA saying it and Mexico will lead the growth for that region. By 2026, the entire international market will be worth $9.5 billion. By comparison, the Canadian and U.S. cannabis markets will be worth $6.3 billion and $46 billion, respectively.
Being one of the few companies to potentially take advantage of the industry's early growth in Germany, Aurora could find itself in a more desirable position than in Canada, where competition is fierce and margins are slim. The market in Germany is not legal yet, but it's easy to see why analysts and investors could soon be more bullish on Aurora.
Domestically, the company is still in cost-cutting mode
Regardless of what happens in Germany, Aurora still needs to clean up its operations in Canada. It has been reducing its expenses along with sales over the past few years, shutting down plants and laying off employees along the way.
In the third quarter of fiscal 2022 (the period ending March 31), Aurora reported an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of 12.3 million Canadian dollars. Getting to breakeven remains a goal for the business and it says that by the first half of fiscal 2023, it will be at a positive adjusted EBITDA run rate.
Aurora has promised adjusted EBITDA profitability in the past, so regardless of when it says it will get there, investors need to take it with a grain of salt. The point is, the company still has work to do in bringing down its costs.
Plus, I'd argue that it's not adjusted EBITDA that investors care about, it's positive cash flow. Dilution is a huge problem for Aurora, and over the nine-month period ending March 31, it used more than CA$83 million to fund its day-to-day operations. As long as that cash burn continues, investors will need to worry about more dilution. Most recently, in June, the company raised $172.5 million through yet another offering.
Aurora remains a big gamble
Aurora trades at just 1.7 times sales, which is cheap compared to Canopy Growth, where investors are paying 3.6 times revenue. But that's irrelevant because as long as Aurora has problems with growth and cash burn, there's really no reason to consider buying the pot stock. Buying shares of the business is an extremely risky bet for investors to make. There is potential that if Germany legalizes marijuana, Aurora could get a big financial boost from that. However, that can be difficult to estimate, and it doesn't fix the company's problems in its home country.
Although I can see a path for the stock to rally and the business to become more investable (the cash burn has to stop first), that's not something that I expect to happen anytime soon.
