I am neutral on Aurora Cannabis (ACB) as the business has substantial growth potential and the stock price is looking increasingly attractive after a meaningful pullback. At the same time, Wall Street analysts are generally bearish on it and the business model faces regulatory risk.
Aurora Cannabis processes and provides recreational and medicinal cannabis under a wide range of brands, including CanniMed, Daily Special, Aurora, and MedReleaf. The company is headquartered in Edmonton, Canada with stores in over 20 countries, including the United States and Denmark. Today, Aurora Cannabis is a solution for those looking for medicinal or recreational cannabis products through an online channel.
The company has been involved in many clinical and pre-clinical studies to advance the science of cannabis and evolve its product line based on customer expectations.
Strengths
Aurora Cannabis has grown to become one of the world’s largest marijuana producers with a sizable presence in Canada. The rapidly expanding market in North America will facilitate the growth of sales for Aurora Cannabis in the coming years. There is also the potential for increasing the sale of recreational marijuana, provided the Joe Biden government follows through with the legalization process for cannabis products.
A cursory look at the history of Aurora Cannabis reveals increasing sales every year. However, the company has had its fair share of operating losses and is known for diluting shareholder wealth by increasing equity capital.
With that said, Aurora Cannabis is expected to register year-on-year growth of sales figures to over CA$195 million.
Recent Results
Aurora Cannabis grew its net revenue by 10% to roughly $60.1. The sales figures are mostly driven by its industry-leading medical cannabis business. The net revenue for its medical cannabis products was $41.0 million, representing an increase of 23% from the prior year. Management attributes this increase to growth in the international market and an overall reduction in production costs.
Valuation Metrics
ACB stock is very difficult to value, given that it has generated very inconsistent results throughout its history and is currently not profitable. That said, it trades at just 4.27x on an Enterprise Value to Revenue basis and is expected to grow revenue at a pretty substantial pace in the coming years, likely reaching EBITDA profitability sometime in 2023. As a result, if it can deliver on its growth projections it could very likely generate strong returns for investors over the long-term.
Wall Street’s Take
According to Wall Street analysts, ACB earned a Moderate Sell analyst consensus based on zero Buy ratings, two Hold ratings, and two Sell ratings in the past three months. Additionally, the average ACB price target of $6.07 puts the upside potential at 55.2%.
Summary and Conclusions
ACB stock lacks support from Wall Street analysts, as they are generally bearish on the stock and none are bullish. This is understandable, given that the industry faces substantial regulatory risk and the company is not yet profitable.
On the other hand, due to the recent sharp pullback in the share price, the average analyst price target implies substantial upside potential over the next year for the stock. Additionally, the growth projections over the next several years look rather bullish.
Given the speculative nature of the business, investors might want to consider adding shares after a further pullback in the stock, as the growth story does look promising and a wider margin of safety should help mitigate the regulatory risk.
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