Amid A Pot Stock Boom, I Have Misgivings About Aurora Cannabis Stock

Aurora Cannabis (NYSE:ACG) isn’t consistently profitable and has failed to meet Wall Street analysts’ earnings estimates in three out of the past four quarters. Like other pot shares, ACG stock is on a tear, up more than 50% since the start of the year as investors bet that better times lie ahead.

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However, expectations for Aurora stock don’t appear to be justified by the fundamentals. The company’s penchant for dilutive acquisitions is particularly troubling.

Massive Dilution

As of the latest quarter, ACB had had more than 1 billion shares outstanding, more than twice the 478 million shares it had a year earlier.  Rival Canopy Growth’s (NYSE:CGC) share count is about 238 million. Fortune 500 stalwarts such as CBS (NYSE:CBS) (351.9 million), Southwest Airlines (NYSE:LUV) (543.7 million) and McDonald’s (NYSE:MCD) (763.6 million),  each have fewer shares outstanding than ACB.

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Let’s not forget the options to purchase 19.96 million ACB shares awarded in March to billionaire Nelson Peltz when Aurora named him as a strategic advisor. Though Peltz certainly has the connections to make things happen for ACB, that award is still massive since the company’s current top shareholder Vanguard “only” had 20.3 million shares, as of the end of 2018.

Profitability Struggles

Meanwhile, ACB is struggling to achieve consistent profitability. Wall Street analysts are expecting the red ink to continue through at least 2020. They have an average price target on the stock of $14.27, a potential upside of 40% for reasons that elude me.

A glut in the Canadian pot market will keep prices depressed for the next two to three years just as ACB ramps up production. While I realize that ACB aims to push down prices,  it seems that the plan may work too well.

Demand also hasn’t been robust.  According to Health Canada, total sales of dried cannabis grew 7% to 16,488 kilograms between January 1 and March 31 compared with October 16 to December 31, 2018.  The total inventory of weed was 30,802 kilograms, as of the end of March, nearly twice the 18,940 kilograms at the end of December 2018.

Negative View On Beverages

Speaking during the company’s recent earnings conference call, chief executive Terry Booth surprised investors with his negative comments regarding the demand for cannabidiol (CBD)-infused beverages given the reports that his company held talks with Coca-Cola (NYSE:KO) about a partnership.  

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Other companies including Canopy, are more optimistic about the potential for CBD, which lacks the THC compound that makes users high, in beverages. Constellation Brands (NYSE:STZ) invested $4 billion in CGC last year. Anheuser-Busch InBev (NYSE:BUD) teamed up with Canadian pot producer Tilray (NASDAQ: TLRY) on a $100 million initiative to research uses of CBD in non-alcoholic beverages. Heineken’s Lagunitas brewery released a non-alcoholic THC-infused beer called Hi-Fi Hops last year. Molson Coors (NYSE:TAP) joined forces with Quebec-based cannabis company HEXO to develop non-alcoholic beverages.

Bottom Line on ACB Stock

Though I had some concerns about Canopy Growth,  I like those shares more than ACB stock.  Canopy’s partnership with STZ gives it financial flexibility that Aurora Cannabis lacks.  If you want to buy stock in the highly risky legal pot sector,  there are better choices than ACB.

–Jonathan Berr doesn’t own shares in any of the stocks discussed in this post.

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