It’s essentially impossible to fundamentally value a pot stock like Aurora Cannabis (NYSE:ACB). Should Aurora Cannabis stock trade at 20X 2020 revenue, or 30X? How will revenue ultimately be? What do margins look like? Bull or bear, we simply don’t know.
The legalized marijuana industry is only a few years old. There aren’t comparable agricultural businesses targeted by literally dozens of public companies basically all at once. To some investors, marijuana will be commoditized within a matter of years. To others, the industry is at the beginning of a cycle that will make it one of the largest — and most profitable — consumer sectors in the world.
Valuing pot stocks now largely is a cosmetic exercise. The beauty — and the value — is in the eye of the beholder. That’s doubly true for Aurora Cannabis stock …
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Looked at one way, ACB stock is the best play in the cannabis sector. Looked at another, ACB stock is the most likely to blow up (and blow up quickly). What makes ACB so interesting is the fact that both of those assessments may be true.
Right now, there are two marijuana stocks with a notable edge on the industry: Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON). Both companies have received multi-billion-dollar investments from larger consumer plays. Canopy took some $4 billion from Constellation Brands (NYSE:STZ,STZ.B). Cronos received nearly $2 billion from cigarette manufacturer Altria (NYSE:MO).
Both companies, then, have partners that already have had a ton of success with legalized drugs. And each has a war chest of cash for acquisitions, marketing, talent and infrastructure.
That combination seems to give Canopy and Cronos quite the head start. Certainly, both companies have room for error relative to less well-funded rivals like Aurora and Tilray (NASDAQ:TLRY). And so an investor who believes in the long-term potential of the marijuana space very well could focus on CRON and CGC.
Admittedly, it’s not guaranteed that both companies will be the winners. But it seems likely they each at least will have a place at the table. The combination of capital and expertise seems hugely valuable as the industry matures.
What’s interesting about Aurora Cannabis in that context, however, is that it seems to have been more aggressive in the early going. Canopy, for instance, acquired Hiku to expand its retail reach. But even those heavily backed rivals can’t come close to matching the sheer number of opportunities Aurora Cannabis has amassed.
Aurora has been aggressive buying smaller companies with its own stock, with subsidiaries now including Whistler Medical Marijuana, CanniMed Therapeutics, MedReleaf and ICC Labs. It has seemingly unmatched geographic reach, with markets in Australia, Brazil, Mexico, Italy, Poland and beyond.
The company has been similarly quick on product development. It’s launching softgels including THC and CBD. Both Aurora and MedReLeaf have released topical creams. If there’s an angle to take in delivering either THC or CBD, Aurora is trying to get there first.
Those aggressive moves now can pay off in the future. Certainly, not all of them will. An international market or two (at least) inevitably won’t pan out. Some of the product extensions may disappoint. But Aurora’s reach is getting to the point where it has at least a foot in the door in so many products and so many markets that sheer math might suggest the company is going to have at least a few hits.
And while it’s true Aurora doesn’t have the major investment of Cronos or Canopy — at least not yet — that’s not necessarily a bad thing. ACB stock has been diluted by the acquisitions (its share count is heading to 1 billion-plus). But Canopy and Cronos were diluted heavily by the major deals as well. In the meantime, the more aggressive ACB may be getting to the better opportunities more quickly.
The risk here is that Aurora is moving too fast — and perhaps paying too much. In December, Ian Bezek detailed concerns about a recent acquisition in Mexico, and that deal highlights the larger risks here. Aurora is going into Mexico, which is a country with significant domestic production capabilities, and it is buying a company whose presence is limited. Is that a wise use of ACB stock or management resources?
More broadly, can a single company manage such a far-flung operation — particularly without the fortress balance sheets held by Cronos and Canopy? Is Aurora Cannabis, as Bezek put it, “spreading itself too thin�
Developing myriad products is the only first step: it needs to be marketed to consumers and sold to retailers. International management teams need to be put into place.
This requires time, execution and capital. Aurora Cannabis likely has the time. As far as the second two factors go, the outlook is far less certain. Recent revenue growth continues to be impressive but sales are soaring across the space. An opportunity like Canada’s recreational market isn’t going to come around every year. We don’t know how well-managed Aurora truly is — and we won’t until competition becomes more important and execution becomes more paramount.
And so ACB stock seems like the quintessential pot stock. This is an industry that requires a bit of “feel†and can be seen differently by individual investors. That’s doubly true for Aurora Cannabis stock.
Is this strategy, which seems close to “shoot first, ask questions later,†an effective way to gain scale across a growing global market? Or is it a case of management ambitions outpacing the company’s available resources?
If it’s the former, Aurora can maintain its early lead in terms of production and revenue and become a sector leader. If it’s the latter, capital will get used up quickly – and additional funding will have to come from more dilution, or in a worst-case scenario, nowhere at all. It’s clear that Aurora Cannabis is taking a huge swing. The outcome seems likely to be either a home run or a strikeout.
As of this writing, Vince Martin has no positions in any securities mentioned.
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