Is Aurora Stock Undervalued?
With the CanniMed Therapeutics Inc (OTCMKTS:CMMDF, TSE:CMED) and MedReleaf Corp (OTCMKTS:MEDFF, TSE:LEAF) acquisitions coming to a close, Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB) is poised to become the biggest weed stock in the world. Unfortunately, no one seems to care.
Investors have all but abandoned Aurora stock. Why else is it trading at a steep discount relative to its peers? Our report takes a deeper look at this question. We also dive into recent acquisitions, earnings, and our ACBFF stock forecast for 2018.
But first, let’s answer the fundamental question. Is Aurora stock undervalued?
Short answer: Yes.
I say this with caution, however, because I’m fully aware that Aurora is highly leveraged. In fact, some people would argue it’s overleveraged. Maybe it is, maybe it isn’t. The point is that Aurora is taking big risks with the hopes of equally high rewards.
If this were a giant poker game, Aurora would be the guy wearing tinted glasses and a baseball cap, pushing his chips—all his chips—into the middle of the table.
That’s a huge gamble, obviously.
But I think the old maxim, “fortune favors the bold,” will hold up.
Regardless of its perilous financial position, I continue to believe that Aurora stock can emerge as a dominant force in this multi-billion industry, even if its share price suffers volatility in the interim.
Aurora Cannabis Acquisitions
Acquisitions have been a big part of this story. Aurora is scooping up marijuana stocks right and left, hoping to wipe out the competition when Canada legalizes recreational pot on July 1, 2018.
One of the acquisitions closed in March 2018. The second continues as of this writing, though it appears to have a smooth road ahead. Below are quick summaries of each.
Aurora Cannabis and CanniMed
Buying CanniMed Therapeutics hurt ACBFF stock. It was messy.
At the beginning of the deal, sometime in late 2017, Aurora presented CanniMed with a stock-and-cash buyout offer. CanniMed refused. Perhaps that could or should have been the end of the story, but CanniMed started exploring a potential merger with Newstrike Resources Ltd (OTCMKTS:NWKRF, CVE:HIP).
This created a ton of uncertainty, as Aurora claimed to have 38% of CanniMed’s shareholders on its side, meaning that it could pursue a hostile takeover.
So, we had two potential outcomes:
- Aurora buys CanniMed.
- CanniMed merges with Newstrike.
Markets were not happy with this level of chaos. We saw evidence of this in the ACBFF stock price, which took a major hit as CanniMed weighed its options.
Eventually, the company backtracked.
It withdrew from the Newstrike deal, returned to the bargaining table with Aurora, and hammered out a $1.1-billion acquisition price.
Aurora Cannabis and MedReleaf
Mergers are happening all over the cannabis industry, but none of them are as big as the Aurora-MedReleaf deal. It was huge—a $3.2-billion all-stock acquisition that instantly makes Aurora the largest weed stock in existence.
Unfortunately, investors are too blinded by the CanniMed acquisition (and Aurora’s finances) to see the upside. The market reaction was negligible. However, I don’t care about short-term reactions, since they’re often wrong.
Markets have a history of short-term errors. If they didn’t, we wouldn’t be able to make money from investing.
Aurora Cannabis Earnings
Aurora made only $16.1 million last quarter. That’s puny. But I try to remind investors that Aurora is like biotech stocks that have patents pending with the U.S. Food & Drug Administration (FDA)—it can only ramp up profits once marijuana is legalized. (Source: “Aurora Cannabis Announces Q3 Fiscal 2018 Results,” Aurora Cannabis Inc, May 8, 2018.)
Since that’s only going to happen in Canada on July 1, 2018, and in the U.S. probably over the next few years, investors are a little skeptical about Aurora’s expansion plans.
After all, what bank would finance a $3.2-billion acquisition when revenues are only $16.1 million per quarter? Short answer: None.
No bank with a competent manager would ever finance such a far-fetched deal, which is precisely why ACBFF stock price is down more than 50% this year.
You see, Aurora financed its expansion by issuing new shares. Although this allows the company to buy really expensive companies, it also dilutes the value of existing shares.
This sort of thing drives investors nuts.
“Why should our slice of Aurora be sacrificed on the altar of expansion?” they ask.
Well, once again, because Aurora is like a biotech stock.
Biotech stocks pour money into research & development, or buy existing drugs, in order to build up their balance sheet. Aurora is doing the same thing with marijuana.
Once both acquisitions are complete, Aurora will be able to produce 570,000 kilograms per year, which, by the way, is more than Canopy Growth Corporation (OTCMKTS:TWMJF, TSE:WEED).
So, try not to lay too much stress on its weak income statement—the balance sheet is what counts right now.
ACBFF Stock Forecast 2018
Given the recent slide in Aurora stock price, I find it hard to understand why anyone would walk away from this investment. It’s trading at a 50% discount.
Some roadblocks exist, I’ll grant you, but they’re not very persuasive.
For instance, I’ve heard critics point to Aurora’s recent application for a spot on the New York Stock Exchange (NYSE) as hubris. Why? Because the Trump Administration (read: Jeff Sessions) could block the listing?
We all know that’s a possibility, but it doesn’t seem likely, given that Sessions failed to penalize Cronos Group Inc (NASDAQ:CRON) for listing on the Nasdaq.
Others argue that the Canadian government won’t keep to its promised schedule. Or that marijuana demand is lower than we expect. They cook up a dozen reasons without ever addressing the fact that the Aurora stock price already crashed this year.
In other words, it would return 100% gains simply by returning to its 52-week high.
Our Aurora stock forecast for 2018 shows it reaching $10.00 before the end of the year, and $17.00 partway through 2019.
Marijuana stocks are undoubtedly over-exposed. Not all of the companies you currently read about will exist four or five years down the road, which means this might be a winner-take-all type of market.
Aurora clearly believes that’s the case. The company is willing to irritate shareholders in order to secure market share. It is playing the long game.