CEO Resignation Adds Uncertainty to Aurora Cannabis Stock

Aurora Cannabis stock (NYSE:ACB) is declining in early morning trading December 23 on the weekend news that chief corporate officer Cam Battley is leaving the company. Shares of the beleaguered cannabis company were down 2% in premarket trading and plunged over 8% when the market opened.

Battley is joining the board of MedReleaf Australia. Aurora has a 10% stake in the Australian company. In addition to Battley leaving the company, ACB stock was also being weighed down by filings that revealed one of Aurora’s directors sold 57% of his holdings. While there can be many reasons for insiders to sell their stock, the sheer size of the decline is a problem.

ACB stock looks like more of the same to analysts

The news is just the latest piece of bad news in what has been a year full of bad news for the company, which has seen its stock fall 55%. It’s also leading some analysts to suggest the stock may be on the verge of collapsing.

In a note Monday, Bill Kirk, executive director at MKM Partners wrote, “Directors selling and executives leaving gives us increased confidence that profitability is not on the horizon and Aurora’s 2.0 products will do little to turn the ship.” Kirk lowered his price target for ACB stock to $1.52.

However, some analysts are not as bearish on the stock. Of the 19 analysts who rated the stock, 10 are still giving the stock a buy rating. And the average analyst price target is $3.95.

 For its part, Aurora issued a corporate update on Monday in an attempt to alleviate investors’ concerns. The company cited two ways it is preserving capital. The first is the announcement that it had retired the majority of $230 million in convertible notes that were coming due in March 2020. The company also announced it would be holding off on building and commissioning additional growing facilities that would preserve an additional $200 million.

Supply is not the problem

The last move addresses a key issue for two reasons. First, nobody was questioning Aurora’s ability to supply the market. And second because the market in Canada is still dealing with a fundamental imbalance between supply and demand. This is driving down the cost per gram and continuing to put pressure on margins and profits in an industry where the main product is largely being seen as a commodity. Through September 2019, Aurora saw its average selling price fall more than 20% to CA$4.90 per gram.

Can Cannabis 2.0 provide lift for Aurora Cannabis?

The cannabis sector has been betting on Canada’s “Cannabis 2.0” as an opportunity to start correcting the supply and demand imbalance. As of October 2019, Canadian regulators are opening the market to CBD and THC products such as edibles, gummies, and vapes. Aurora plans to start selling these products in January.

However, the initial roll-out has not unleashed a flood of available retailers while competition in the black market still lingers. And some analysts are skeptical that this new market will be enough to counteract the rapid pace to which Aurora is burning through cash. In fact, one analyst recently gave ACB stock a price target of $0.

According to Gordon Johnson of GLJ Research, Aurora will likely be facing a liquidity crisis in 2020. “Our view that ACB’s equity holds no value is driven by our work, which implies the company is facing a liquidity crunch that will, ultimately, risk its status as a going concern,” Johnson said.

Aurora has thus far relied on borrowing from banking partners. However, faced with continued operating losses, this may no longer be an option and the company may run out of cash before it becomes profitable.

"As the pace at which Aurora Cannabis is burning cash becomes clear to the market, barring additional resources from the capital markets, our work suggests the company will run out of cash before 7/1/20," Johnson said.

Is there a path to profit for Aurora Cannabis?

First of all, let’s be clear. None of the major cannabis companies are profitable at this point. However, what other companies such as Canopy Growth (NYSE:CGC) and Cronos Group (NASDAQ:CRON) have that Aurora does not is major cash influxes from third-party companies who are trying to partner with cannabis companies.

Notably, Constellation Brands (NYSE:STZ) has made a $4 billion investment in Canopy and the tobacco giant Altria (NYSE:MO) has given Cronos a $1.8 billion investment. Up to this point, Aurora has shown a reluctance to sell a large equity stake. And, in fairness, to do so now would probably deliver less attractive terms.

Ultimately, the markets hate uncertainty and Aurora is delivering far too much for investors to be comfortable. I’m a big believer in the long-term growth of the cannabis sector, but some players may not make it to the finish line. Increasingly it is looking like Aurora may fit that description.