While not bullish on Aurora Cannabis (ACB) long term, the stock could still reach $11 in the short term. The cannabis sector has several catalysts to push stocks higher before the oncoming flood of supply dips the market into oversupply in the next few years.
Bullish Call
Merrill Lynch analyst Christopher Carey came out with a bullish call on the leaders in the Canadian cannabis sector with global expansion hopes. The analyst placed a $52 price target on Canopy Growth (CGC) and an $11 price target on ACB.
Following the bullish call, Aurora traded back to $9 providing a prediction of about 22% upside for the stock listed on the NYSE. The call isn’t really that bullish to warrant owning the high-risk in the sector long term, but investors should still consider the ability of Aurora to rally beyond $11 such as the all-time high just above $12.50.
The company has a diluted share count that is marching towards 1.1 billion shares. The $11 price target places the market cap at a very aggressive $12.1 billion or C$16.2 billion.
How the Target Works
Aurora is aggressively pushing into the farming aspect of cannabis. The company recently announced plans to expand production to 625,000 kg from around 550,000 kg. The LatAm operations have aggressive plans as well that will push total production to top 1 million kg.
The next big step for Aurora is for the June quarter to see supply reach 25,000 kg from only 7,822 kg in the December quarter. Whether the Canadian cannabis giant can maintain stable sales prices is crucial to making the following step in quarterly supply to in excess of 100,000 kg or a 15 fold increase from 2018 levels.
Carey predicts that the Canadian market won’t reach cannabis oversupply until 2021. The stock can hit $11 anytime, but a delay in the oversupply outcome from sometime in 2019 or 2020 increases the odds of Aurora reaching new highs.
In Q4, Aurora got just under C$7 per gram of cannabis sold. Assuming 500,000 kg sold at this price would provide an incredible C$3.5 billion in annual sales.
Suddenly, the C$16.2 billion target market cap wouldn’t seem that expensive. Aurora would still have the additional production capacity coming online plus the LatAm operations.
The easy path to $11 and even above $12 is the announcement of a major joint venture from the work with advisor Nelson Peltz. The deal might not even have to be all that material for the market to latch onto any catalyst for a CBD deal in the U.S. with a global beverage or consumer goods company. CBD-infused products such as beverages and edibles or even oils along with medical cannabis are expected to provide higher sales prices and profits.
The long-term risk to these stories is a collapse in prices. A price dip in half to C$3 to C$4 per gram would still lead to substantial revenue growth. In such a scenario, one would have to worry about lower margins crimping profits. A lot of disgruntled investors might question why Aurora wildly built supply to push the market into an oversupply situation so quickly after legalization in Canada at the end of 2018.
Takeaway
The key investor takeaway is that Aurora has several paths to easily reach $11 in the short term. The big key long term is whether cannabis prices remain stable as the company brings on a substantial increase in supply in the face of a strong illegal system that can avoid the regulator costs and taxes. Any hint of collapsing prices when end the rush to own the Canadian cannabis stocks.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.
Disclosure: The author has no position in ACB stock.
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