Aurora Cannabis Is Speculative — And It Might Take a Breather Soon

The new year has started on a high note for investors in Aurora Cannabis (NYSE:ACB) stock. Year-to-date (YTD), ACB stock is up over 48%. By comparison, the S&P 500 index is up by about 4.3%.

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Over the past several months, hopes for U.S. federal legalization of cannabis under President Joe Biden have provided significant tailwinds for the sector. However, discourse around the issue remains heated. For instance, recent research led by Prof. Aimee Huff of Oregon State University highlights the following:

“[I]n the U.S., recreational cannabis remains illegal at the federal level, and while it has shed many of its countercultural associations, its consumption maintains associations with delinquency for many mainstream consumers, including those who have consumed it in the past. […] In short, full public acceptance of the market has not yet been attained […]”

Many cannabis stocks have been on fire over the past couple of weeks, however, thanks in part to the bullish bets of Reddit traders. Following the highly-publicized moves in names like GameStop (NYSE:GME), day-traders and retail investors recently turned their attention to the cannabis space.

But as moves in GME have shown, gains in such speculative bets are usually short-lived. In fact, ACB stock has come under pressure in the past several days. And unless there is full federal legalization, I do not expect the gains in marijuana to be permanent. So, if you have paper profits, you might want to ring the cash register now.

ACB Stock and Recent Earnings

Released on Feb. 11, ACB stock’s second-quarter results showed total cannabis net revenue of 70.3 million CAD ($55.7 million), excluding provisions of 2.7 million CAD ($2.1 million), an increase of 11% year-over-year (YOY). In previous months, management had indicated that the pot group would become positive adjusted EBITDA during this quarter. Yet, Aurora failed to reach an adjusted EBITDA profit. Instead, it reported a sizeable loss of 12.1 million CAD (nearly $9.6 million).

Meanwhile, net loss came in at nearly 292.7 million CAD ($231 million), wider than most analysts’ expectations. Analysts have been concerned about the never-ending cash burn at Aurora.

On a more positive note, though, ACB’s main product categories — recreational marijuana and medical cannabis — both saw annual revenue increases. The medical segment’s 42% growth rate is good news for investors, as medical cannabis commands higher margins. International sales played a crucial role in that medical segment growth —  those sales rapidly increased by 562%. On the results, CEO Miguel Martin stated:

“[O]ur year over year cash use has decreased by 74% to $70.5 million [($55.8 million)], our normalized margins remain solid particularly in medical, and our recently amended credit facility gives Aurora much improved optionality as opportunities arise. Combined with $565 million [($447 million)] in cash on our balance sheet today, Aurora will continue to be a long-term player in the global cannabinoid market and increasingly positioned to deliver for shareholders over the long run.”

All in all, though, metrics in ACB’s second quarter provide limited reasons for investors to own the stock long-term. Negative cash flows and lack of profits do not support the share price. On top of that, analysts’ current price target for ACB stock ranges from a high of $14.59 to a low estimate of $3.62, with an average price of $9. Its trailing price-sales ratio of 7.78 times is also on the frothy side. Therefore, current investors with profts might want to take some money off the table.

The Bottom Line on Aurora

Despite the recent returns, Aurora Cannabis remains a speculative instrument. Without increased revenues from U.S. federal legalization, the current top-line growth is not enough to justify its valuation. Similarly, without a sustainable path to positive EBITDA, expecting the price to continue increasing in double-digits is unrealistic.

However, as daily headlines change, die-hard cannabis fans are ready to bet on federal legalization news. Therefore, ACB stock will likely stay volatile with wide weekly swings. Because of that, I’d exercise caution at these levels.

Finally, investors who don’t want to commit to ACB but still want to invest in cannabis should consider an exchange-traded fund (ETF). That could give you alternative exposure to a diversified basket of marijuana equities. Some notable pot ETFs include AdvisorShares Pure Cannabis (NYSEARCA:YOLO), Amplify Seymour Cannabis (NYSEARCA:CNBS), The Cannabis ETF (NYSEARCA:THCX) and ETFMG Alternative Harvest (NYSEARCA:MJ).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.

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