Dip in Shares of Aurora Cannabis Creates an Opportunity

Chris Lau - finance.yahoo.com Posted 5 years ago
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Investors should brace for the steady decline in cannabis stocks to continue in the near term. So long as stock markets decline, fueled by trade tensions between the U.S. and China, markets will have little appetite for risk. Those include companies that are spending to expand but are not yet profitable yet. The FDA’s public hearing on Friday about CBD safety is unnerving investors, too. With that in mind, cannabis play Aurora Cannabis (NASDAQ:ACB) stock is especially vulnerable for a further drop.

ACB Stock: Dip in Shares of Aurora Cannabis Created a Buying Opportunity
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The company reported a big loss in its fiscal third quarter despite revenue tripling over last year’s levels.

Aurora reported revenue of $48.4 million in the third quarter, up 289% from last year. It lost 8 cents a share even though the cost to produce fell sharply, from $1.92 to $1.42 a gram. Aurora Sky coming online lifted operational efficiency and scale. Still, investors might want to wait for the company to report positive EBITDA results before taking too big a position in Aurora stock.

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Getting to EBITDA-positive numbers will depend on net selling prices holding above at least the $6 level. In Q3, the average net selling price fell to $6.40, due to a higher mix of dried cannabis sales in the product mix. Excise tax on medical cannabis also hurt prices as Aurora absorbed this cost. Revenue from extracts fell, hurting ASP. Looking ahead, when extraction capacity increases, extract sales will increase and will lift ASP.

Aurora forecasts EBITDA-positive numbers for the fourth quarter as it puts its inventory into new products. Its stock price is trending downward today but could quickly reverse if the company’s sales drive EBITDA profitability next quarter.

Aurora Cannabis Increasing Production

Aurora forecasts annual production capacity of 100,000 kilograms in 2019 and 150,000 kilograms by the first quarter of FY 2020. Output volumes will benefit from the Bradford and Sky facilities coming online to increase production.

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Aurora and the other cannabis producers will continue to benefit from targeting the under-served, under-supplied Canadian market. With very strong demand in the country, Aurora may grow market share faster than competitors the sooner its facilities produce more product.

Aurora’s addressable market could potentially grow in an instant. This would depend on regulatory changes and coverage. Just as its addressable market increased following cannabis legalization in Canada, the same could happen in Europe. For example, insurance reimbursement approvals in Europe would give the industry 850,000 potential patients.

Sell-Off Creates a Buying Opportunity

In the near-term, Aurora will trade like a wild speculation because it does not have any profits yet. With the ~14% drop in the stock price in the last week and an 18.5% drop in the last month, traders who missed the rally may look at ACB stock again. After closing recently at $7.16, the stock’s accelerating downtrend could send shares back to the $5-$6 level, its lows for 2019. At that level, traders could start another position and hold the stock. By waiting for the company to increase production to meet the strong demand, a smaller loss or a break-even quarter could spark a stock rally.

Six of the seven analysts covering Aurora Cannabis have a “buy” rating on the stock and a $9.18 price target (per Tipranks). In a 5-year DCF Growth Exit Model, the company needs revenue growing by at least 100% annually to justify a fair value of between its $7.16 stock price and $8.50.

Your Takeaway for CGC Stock

Cannabis legalization will no doubt continue worldwide, creating a bigger addressable market for cannabis suppliers. In the short-term, the stock price of companies like Aurora Cannabis is prone to a sell-off. It could also spike higher when market fears subside. Timing either event is impossible.

If an investor wants exposure to the cannabis stock sector, pick an entry point and then start a small position. From there, wait for the company to start reporting profits.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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