Is Aurora Stock Still Undervalued?
Although most cannabis stocks have recovered from the first-quarter slump, one company is lagging behind: Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB).
If you’re wondering how that’s possible, or why Aurora stock is still undervalued, rest assured, you’re not the only one—it has bothered me for weeks.
After all, Aurora was one of the market’s best-looking marijuana stocks in 2017. It advanced more than 343%! How could it suddenly become the ugly duckling of cannabis equities?
Before I answer that question, let me sketch a quick portrait of Aurora’s financial situation. In its most recent quarterly review, the company reported that:
- Registered patients increased 78% year-over-year.
- Grams of marijuana sold increased 115.9% year-over-year.
- Total revenue increased 201.2% year-over-year to $11.7 million.
- Cash costs per gram decreased 24.6% year-over-year.
- Production capacity was 240,000 kilograms per year.
Not bad, right? Aurora officially became the biggest marijuana company (by production capacity) after it absorbed CanniMed Therapeutics Inc (OTCMKTS:CMMDF, TSE:CMED).
This, plus the development of the “Aurora Sky” facility, gave the impression that ACBFF stock would lead stock market gains again in 2018.
That hasn’t been the case so far, however. Here’s why.
Investors Are Worried About Runaway Valuations
Aurora Cannabis has a market cap of $3.4 billion. At its peak, when ACBFF stock was trading near all-time highs, the valuation was closer to $6.7 billion.
Think about that for a second. Aurora has a multi-billion-dollar valuation, yet it only sold $11.7 million worth of cannabis in the first fiscal quarter of 2018. You don’t need to be John Nash to see that the math doesn’t add up.
And investors aren’t blind…
Fear seeped into the market. Doubts that marijuana stocks could ever justify their valuations ran amok. And finally, a crisis of faith brought weed stocks crashing down, costing ACBFF stock 43% of its valuation in the process.
Chart courtesy of StockCharts.com
Some marijuana stocks landed at reasonable valuations. Investors later used these sensible prices as the basis for a renewed bull run. But, at more than 400 times earnings, Aurora stock is still a tough sell. Too many people think it’s overvalued.
This fear grows stronger as we inch toward July 1 (the day Canada is legalizing adult recreational marijuana use).
Investors are terrified that another reality check is waiting for them. This is forcing investors to look past the haze of distant optimism surrounding marijuana stocks and confront the truth about overblown valuations.
Will Aurora Stock Continue to Underperform?
Short-term: I think Aurora stock will continue to underperform.
Long-term: I think Aurora stock is headed much higher.
When it comes to marijuana stocks, I always thought investors should “trade the rumor, sell the news.” Don’t get me wrong, there’s tremendous potential in the marijuana market. I truly believe it could rival the alcohol business one day.
But the short-term risks cannot be denied.
What if there’s marijuana oversupply this year? A lot of companies have joined the fray, hoping to carve out a chunk of market share for themselves. Not all of them will survive, of course, but they could bring down prices in the short term, thereby hurting everyone’s profitability.
That’s a real concern.
It takes a while for “survival of the fittest” to kick in. Investors were far too optimistic in thinking that changes would happen overnight. As a result, they’re going to be disappointed repeatedly in the short term.
However, if you stretch out the time horizon, there’s a lot of optimism to be found.
Aurora is making a strong international sales push in Germany, plus some inroads in the rest of Europe. Further, its Aurora Sky facility officially found a home in Medicine Hat, Alberta, Canada.
Aurora stock is the definition of a risk-capital investment, particularly at this stage of the investment cycle.
You stand to gain a lot over the next few years, but only if you’re willing to ride out some of the short-term volatility.