Based in Alberta, Aurora Cannabis offers high-quality cannabis products in the medical and recreational markets.
Have a look at the company’s brands. Hopefully, you may be already knowing some of them:
Source: Aurora Cannabis
Source: Aurora Cannabis
I wanted to talk about Aurora because many traders believe that the Biden administration will be beneficial for cannabis companies. It does not matter whether they legalize marijuana at a national level or not. Even if they don’t approve legalization from 2020 to 2027, democrats will help the industry in one way or the other. This is my opinion.
With that, let’s note that Aurora is not expected to be a profitable company in the coming years. Most traders are looking at the company’s sales growth, which will most likely be great. But, if we take a look at the expected net income, we cannot say good things about Aurora. Most analysts are not expecting Aurora to be profitable in 2023:
Source: Market Screener, Numbers in CAD
If we assume 2023 EBITDA of $100-150 million and a market capitalization of $2 billion, ACB trades at 13x-20x EBITDA. I am not buying shares at that valuation. Notice that the company’s operating margin is small, and sales growth is less than 40% y/y. With these figures, I don’t understand why traders are buying shares at the current stock price.
Yes, it does not matter how much the amount of revenue or sales agreements ACB reports. Investors out there want to hear about profitability. We heard a lot about sales growth in 2018, and the share price went from $100 to less than $10.
Read below one of the agreements released by ACB. In my opinion, the agreement is not a game changer:
Source: ACB
Expect Debt To Increase A Lot
Without positive net income, ACB does not seem to be convincing equity investors. The company does not seem to be able to sell shares. Instead, ACB is starting to raise a significant amount of debt. Market analysts expect the company to double its debt from 2021 to 2023. That’s what usually happens when your return on assets and return on equity are negative. With this scenario, I don’t see why equity investors may be interested in acquiring shares of the company:
Source: Market Screener, Numbers in CAD
There is more. In the next two years, ACB does not plan to make meaningful capital expenditures. In the last three years, the company built its factories. Right now, the management does not seem to be interested in increasing its capacity. They are sending a message to the market. We don’t believe that demand for our products will be that high in the future. We have all the capacity needed.
Source: Market Screener, Numbers in CAD
Lack Of Institutional Ownership
There is another interesting fact about Aurora. Institutional investors are not buying shares of the company. According to the NASDAQ, institutions own less than 10% of the total amount of shares outstanding. Aurora has a market capitalization of more than $1 billion. It is extremely rare that large corporations like ACB report that low amount of institutional investors.
Source: Market Screener, Numbers in CAD
Disclosure: I do not have shares of ACB
