As recently as March, marijuana stocks could do no wrong. Many, including the most popular pot stock in the world, Aurora Cannabis (NYSE:ACB), had logged triple- or quadruple-digit percentage gains over the previous three-plus years. These gains came on the back of some very lofty long-term sales projections from Wall Street.
But it's safe to say that the wheels fell off the wagon over the past six months and change. While practically all marijuana stocks have fallen victim to this retracement, it's been particularly noticeable for the most visible cannabis stocks, such as Aurora. Despite being forecast to lead all Canadian growers in peak annual output (possibly as much as 700,000 kilos per year, once all 15 facilities are fully operational), as well as hiring billionaire activist investor Nelson Peltz as a strategic advisor, Aurora's share price has retraced by 65% in about seven months.
Quite a many investors would probably consider this to be an unjustifiable retracement. After all, we are talking about one of the most-held stocks on Wall Street. But five factors suggest that this 65% plunge in Aurora Cannabis' stock in a seven-month span is completely warranted.
1. Persistent Canadian supply issues
To begin with, the entire Canadian cannabis industry has been contending with supply shortages since day one of legalization a year ago. Despite strong consumer demand, a combination of problems has kept supply from hitting dispensary store shelves.
Regulatory agency Health Canada, for instance, has been unable to quickly review cultivation and sales licensing applications for growers. In many instances, it's taking many months to perhaps more than a year for pot growers to get the green light from Health Canada to plant, harvest, process, and/or sell their cannabis.
Along those same lines, we've also witnessed select provinces slow-step the rollout of physical dispensaries. Without adequate retail stores available for consumers to purchase marijuana products, they've been forced to either buy online and wait for their cannabis to arrive, or buy from the black market.
Aurora has said that certain supply issues are beyond the company's control, which is a roundabout way of saying that supply problems will continue to persist, no matter what sort of internal efficiencies the company achieves.
2. Subpar operating results
Perhaps it's no surprise that persistent supply issues have also played a big role in Aurora Cannabis generating subpar operating results.
In Aurora's most recent quarter, the company recorded 98.9 million Canadian dollars in sales, a reasonably healthy gross margin of 58%, and 29,034 kilos of cannabis production, which came in at the high end of the company's own guidance. Yet, Aurora's CA$98.9 million in sales actually missed the low end of its own sales forecast issued just five weeks prior to releasing its fourth-quarter results.
Worse yet, Aurora's management had been forecasting earlier in the calendar year that the company would push into recurring positive adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) by the fiscal fourth quarter. When its Q4 report was actually released, Aurora produced an adjusted EBITDA loss of CA$11.7 million and looks to be nowhere near close to turning a profit.
3. An international strategy that'll take years to develop
This is also a company that's betting big on international markets. Although all brand-name Canadian pot stocks aim to develop an overseas presence, no company has a more diverse presence than Aurora. Including Canada, Aurora has a cultivation, export, research, or partnership presence in 25 countries.
These foreign markets should be especially helpful if and when dried cannabis oversupply strikes in Canada. Without external sales channels, domestic growers run the risk of serious margin deterioration. Plus, overseas markets are entirely focused on medical marijuana, which leads to generally higher margins than recreational weed sales.
But therein lies the dilemma. Because of persistent supply issues throughout Canada, foreign markets are accounting for mere peanuts in sales for the time being. These overseas markets are unlikely to become a real catalyst for Aurora until domestic demand in Canada is satisfied, and that could take numerous quarters, if not years, based on the issues Health Canada and select provinces have dealt with.
4. A powder keg on its balance sheet
Sure, Yours Truly has beaten the dead horse on Aurora's balance sheet woes before, but they do bear repeating.
A big part of the company's long-term growth strategy is to make plenty of acquisitions. These purchases support capacity expansion, processing, product portfolio breadth, and other infrastructure needs. But the downside of acquisitions in the cannabis space is that, at least in the early going, buyers appear to be grossly overpaying for the businesses they've purchased.
Aurora's more than one dozen acquisitions over the past three years have led to the recognition of CA$3.17 billion in goodwill. This goodwill represents the aggregate premium paid by Aurora for the companies it has acquired, above and beyond tangible assets. Ideally, Aurora will recoup all of this goodwill by building out its acquired assets and monetizing any patents. But it's highly unlikely that, with goodwill currently representing 58% of total assets, the company will recoup all CA$3.17 billion. A more feasible scenario is for Aurora to admit that it overpaid and write down some portion of its goodwill, thereby reducing the company's total assets and leading to a potentially large one-time loss.
5. Ongoing share-based dilution
Last, but not least, Aurora Cannabis has been no friend to its shareholders.
Even though Canadian marijuana stocks now have access to basic banking services following the legalization of weed one year ago, most are still unable to secure an adequate amount of non-dilutive financing. This has resulted in many, including Aurora Cannabis, preferring to sell stock or issue convertible debt to raise capital or fund acquisitions.
Over the past five years, Aurora Cannabis has issued (deep breath) 1 billion shares of stock. Even with the addition of more than one dozen businesses, shareholders have been bludgeoned by this constant barrage of share issuances and capital raises. These added shares will also make it that much harder for the company to produce a meaningful per-share profit in the years that lie ahead.
While Aurora Cannabis may have a bright future over the long run, the near term continues to look pretty ugly for the most popular pot stock.