ACB) stock has been on a terrifying roller coaster since its 2018 debut on the New York Stock Exchange. Since rocketing to a peak enterprise value of $15.7 billion, ACB has since wiped out 93% of shareholder money as profits have failed to materialize.” data-reactid=”12″>Aurora Cannabis (NYSE:ACB) stock has been on a terrifying roller coaster since its 2018 debut on the New York Stock Exchange. Since rocketing to a peak enterprise value of $15.7 billion, ACB has since wiped out 93% of shareholder money as profits have failed to materialize.
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Shares slid 12% on the news. Yet, ACB stock remains the 11th most popular holding on Robinhood, a popular trading app, as speculators cheer Aurora’s news of its new CEO.
But investors shouldn’t hold out hope.
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It’s certainly not a sound investment strategy, no matter how much you love pot. That’s because, as soon as the U.S. government federally legalizes marijuana, Aurora’s grower-centric business model will make it a slow-moving target for nimbler firms.
Here’s why Aurora Cannabis stock is on a slow death march to zero.
ACB Stock: Great Industry, Bad Business Model
Every several years, a new industry emerges that promises 1,000%-plus returns. Legalized marijuana is one of them.
AMZN) has returned 200,000% to investors since its 1997 IPO.” data-reactid=”39″>In many cases, like e-commerce and cloud computing, these industries DO deliver. Amazon (NASDAQ:AMZN) has returned 200,000% to investors since its 1997 IPO.
1,100 major e-commerce companies. By 2004, that number had collapsed to just 31. You would have needed extreme luck or skill to scoop up winners from that pile of wreckage.
eBay-like bidding system for surgical procedures. Patients would submit anonymous requests for surgeries, and the cheapest doctor would get the contract. Sounds like a questionable investment?
And skeptical investors would have been right to stay away. Bidforsurgery.com closed not long after realizing no doctor would risk losing their medical licenses over rock-bottom pricing.
Today, Aurora Cannabis also finds itself on the same losing side of history. Its decision to focus on cultivating marijuana might have seemed like the obvious path into the pot industry. But its overemphasis on production over marketing has left it with a broken business model that will doom the company.
As ACB looks towards bankruptcy in the next 18-24 months, here’s what happened.
Aurora Meets the Lousy Farming Business
As attractive as marijuana growing sounds, it’s still an agriculture business.
rarely breaks 2.5% in any given year.
PM) and British American Tobacco (NYSE:BTI) don’t bother growing their own tobacco. Instead, they’re happy to buy tobacco on contract at just $2.98 per kilogram. Each cigarette, after all, holds only 1 gram of tobacco.” data-reactid=”50″>That’s why all major tobacco companies like Phillip Morris (NYSE:PM) and British American Tobacco (NYSE:BTI) don’t bother growing their own tobacco. Instead, they’re happy to buy tobacco on contract at just $2.98 per kilogram. Each cigarette, after all, holds only 1 gram of tobacco.
Sales, distribution and marketing (and taxes, in the government’s case). The average pack of cigarettes costs $5.51, with customers in many states happily (or sullenly) paying closer to $10.
The tobacco industry’s focus on marketing has paid off; profits at cigarette companies are staggering. Phillip Morris, Marlboros’s maker, generates a 160% return on invested capital (ROIC). That’s roughly as high as Apple’s profit margins.
Did ACB Follow Big Tobacco’s Lead?
18 different growing facilities across four countries. And its income statement has all the signs of a bad agricultural firm.
In Q3, the company produced 36.2 tons of cannabis but sold just 12.7 tons. (Keep in mind, stored marijuana lasts only 6-12 months). Even if the company managed to sell 100% of its production at current prices, gross profit of $82.2 million would have fallen short of its $110 million overhead costs.
“sweeping changes.” And on Tuesday, the company announced Altria veteran Miguel Martin would take over the CEO role. But it might be too late for the cash-strapped firm.
Aurora’s Costs Still Far Too High
marijuana cost estimates. If legalized, he concluded, the cost to produce one pound of commercial-grade marijuana would fall from $225/pound to just $2.50/pound. That’s because, as a crop, there’s little difference in planting lettuce, asparagus, or sinsemilla (a marijuana variety with high psychoactive content)
plummet to under $1/pound.
According to its most recent filings, the ACB spends 2.90 CAD to produce just 1 gram of marijuana, or $1,315/pound. Adding overhead costs makes a total of almost 6 CAD per gram (or $16 per eighth of weed). Even in the illicit U.S. market, those are incredibly high prices for the wholesale market.
don’t seem to care for. Secondly, the company produces in Canada, where they’re forced to use expensive indoor facilities. Indoor growing costs run about ten times higher than outdoor ones.
This spells huge trouble for Aurora. Once (or if) pot legalization happens in the U.S., investors can be sure that cheap imports will quickly replace Aurora’s high-cost production.
ACB on the Brink of Bankruptcy
Aurora might yet figure out a marketing plan. But investors won’t have much time to wait.
laid off 25-30% of its staff, the cuts might not hit deep enough.
That’s because the company also has 128.6 million CAD in current liabilities, which includes leases due this year. Even with planned cutbacks, the company’s burn rate could still top 250 million CAD every year.
In years past, Aurora plugged its cash flow gap by issuing new shares. Today, the company won’t be as lucky. With an 86% decline in share value in the past twelve months, the company will cut far deeper in diluting current shareholders.
What’s ACB Stock Worth?
Marijuana stock investors have long hoped that the U.S. House and Senate would eventually pass federal pot legalization rules. And if legalization happens before Aurora goes bankrupt, investors can be sure of spectacular short-term gains.
But, if ACB continues down its current path, the company will eventually fail as low-cost imports bite. In the commoditized world of farming, it’s a race to the bottom. And ACB stock investors will get taken on that ride.
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