Playing Defense Is All That Aurora Cannabis Has Going For It

It’s hard to find a bullish argument for Aurora Cannabis NYSE: ACB. ACB stock has fallen 74% for the year. And that’s not the worst news. The company’s stock has also fallen 16% since the middle of March at the onset of the pandemic.

And while the stock got one bounce of nearly 200% in mid-May, that’s looking more and more like a dead cat bounce. Since rising to over $17 per share, the trend for ACB stock has been down. This was after the company’s last earnings report, which wasn’t the disaster that may have been expected.

Where Aurora Cannabis was supposed to be different was in its focus on the medicinal marijuana market. This is a global market that is projected to be valued at $73.6 billion by 2027, and is growing at a compound annual growth rate of 18.1%.

But Aurora seems to be losing its way. And with it, the company is losing the confidence of its investors.

Aurora seems to lack focus

The problem for Aurora Cannabis is that while many cannabis stocks such as Canopy Growth NYSE: CGC are becoming hyperfocused on niche categories and markets, Aurora is charging ahead with a broad strategy that seems to be limiting its revenue and profits.

Investors sense this as the company has hinted that its revenue will be lower than the prior quarter. Aurora also announced that it will be recording a $1.8 billion goodwill impairment charge.

The good news is that Aurora understands the situation it finds itself in. Like many cannabis providers, Aurora was wholly engaged in the race to generate supply. But that was so 2018. What these companies quickly realized was that they were massively oversupplied.

This has led to the company’s current restructuring (or in its words “right-sizing”) efforts. As part of this effort, Aurora conducted a 12-for-1 reverse stock split in May.

But cutting costs only gets you so far, particularly when you’re diluting shareholder value to solidify your balance sheet. As the industry begins to consolidate, time may be running out on Aurora’s chances to be a viable part of this market.

Aurora is slow to embrace the derivatives market

Despite all the struggles of the cannabis market in 2019, the enduring hope was from Cannabis 2.0. This was when a variety of cannabis-infused products (vapes, gummies, etc.) would be released for sale. Another area that is growing is cannabis-infused beverages. But this is a market that Aurora is not participating in.

Furthermore, rather than trying to stabilize and grow its business in Canada, Aurora is aggressively expanding its reach into many countries that, according to Aurora, have not reached their full market potential. That may be a great strategy for a profitable company, but that does not describe Aurora.

In fact, Aurora seems to be continuing to make the United States its core area of focus. On the one hand, this would seem to make sense. But in a market that still appears to be years away from being fully open for legal marijuana, it’s a risky gambit for a company that is not showing a profit.

The company completed its acquisition of Reliva, a hemp-derived CBD company. The deal cost Aurora $40 million of its common stock. However, it’s a move that may turn out to be beneficial for Aurora. Reliva has been positive from an EBITDA standpoint over the last 12 months that ended in March. And Aurora has hired Reliva’s former CEO, Miguel Martin, as its CEO.

Investors may be losing patience

As cannabis investors know, the major players in the industry are not profitable yet. In an update to analysts prior to the earnings report, Aurora commented in its latest business update that it was not expecting to achieve positive earnings before interest, taxes, depreciation and amortization (EBITDA) until the second quarter of its 2021 fiscal year.  This isn’t the first time that Aurora has done this. And sadly, investors may be getting a sense that it’s not the last time either.

I’m not expecting Aurora to deliver a stellar report. And the simple reality is that legalization of marijuana at a level that will make any of these companies profitable is still a long time away. A lot of the industry problems should not fall squarely on the shoulders of Aurora. But that doesn’t make the issues less real. And the company is running out of time to convince investors why this time it’s different.