It has been an interesting year for Aurora Cannabis (NYSE:ACB) and its shareholders. Down more than 70% over the past six months, ACB stock has really fallen from grace since it reached its 52-week high back in March. Shares have fallen 14% just since late November, and are currently priced around $2.30.
Looking at the big picture, there’s a big difference between liquor and pot.
Once liquor was made legal in 1933, it was easy to clear out the illegal stuff. Legal liquor didn’t make you sick like bathtub gin did. Prices for the legal stuff weren’t out of line. Moonshiners in the mountains couldn’t supply much of the market, and there was plenty of money from tax revenue to send those boys into NASCAR.
Marijuana is different. It’s hard to tell the difference between legal and illegal pot. Producers and sales channels have a 50-year head start on legal growers. There aren’t enough outlets for legal pot, and the prices are higher than for illegal weed. Even in Colorado, which made marijuana legal in 2012, the illegal market is thriving.
What seemed like a temporary glut for companies like Aurora Cannabis is starting to look like something more chronic.
The Bull Case for Aurora
Aurora stock is down nearly 54% so far in 2019, but it’s still expensive. Trailing year revenues are under $250 million, and the September quarter was worse than June. However, the market capitalization remains $2.1 billion.
That’s because there are still Aurora bulls. InvestorPlace.com writer Chris Markoch holds out hope for Aurora’s production of industrial hemp and its main byproduct, CBD oil. Aurora Cannabis recently bought Hempco, an industrial hemp company in Vancouver, and rebranded it as Aurora Hemp.
CBD doesn’t get you high, so ACB wants to produce food, nutritional supplements, hemp seeds and flour with the product while it waits for recreational channels to open.
Additionally, Luke Lango counsels patience. He sees the Canadian market opening in 2020, as well as potential in things like edibles and vapes. Tom Taulli agrees, and Chris Tyler also sees hope — if you watch Canadian consumption patterns carefully and time your purchases to the market’s bottom.
The bullish argument is to compare today’s pot stocks with yesterday’s dot-com stocks. The dot-bomb crash of 2000 hit everyone, but is hanging in with places like Booking Holdings (NASDAQ:BKNG) or Amazon (NASDAQ:AMZN) that eventually paid off.
The Bear Case for ACB stock
In contrast, the bears say Aurora Cannabis is not just worth less, but worthless.
Gordon Johnson on Tipranks has a two-year price target of zero on ACB stock. He sees Aurora’s debt continuing to rise and believes it’s already in violation of some debt covenants. If Aurora is not making money by the end of the third quarter of its fiscal year — which is in March — he feels the lenders may stop rolling debt over.
Furthermore, InvestorPlace.com writer Ian Bezek also thinks it’s time to pull the plug on Aurora, following its most recent earnings release. Some of the company’s debt is convertible into equity, which would dilute current shareholders. The Rosen Law Firm, which sues companies on behalf of their shareholders, is also going after Aurora. They want to file a class action suit based on what they call misleading information given the public.
The Bottom Line on Aurora Cannabis
Pot stocks were always a speculation.
Investors were betting that pot smokers would prefer legal weed to the illegal variety. However, the savings states like Colorado are seeing a reduced need to arrest, try and jail people is worth more than any tax revenue they may collect on legal sales.
If companies like Aurora were able to sell their product for less than the illegal growers, and expand their distribution networks, they might have a chance. If there were something medically proven in CBD oil, it could be a gold mine.
Nonetheless, the clock is ticking. Companies like Aurora that invested heavily based on the assumption of quick profits are getting their comeuppance. There are easier ways to make money.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.