Our Aurora Cannabis Stock Prediction In 2019 (Buy or Sell?)
During the Woodstock era of the 1960s, “pot” was the forbidden fruit that hippies, freaks, college kids, rock stars, and rebels of all stripes imbibed to taunt the establishment.
Fast forward to October 17, 2018. That’s when Canada legalized on the federal level the possession and use of recreational marijuana. The vast potential wealth of “canna-business” is intoxicating individual investors around the globe.
Canada was the first G7 nation to take this bold step and it triggered an earthquake in the worldwide marijuana industry. In tandem, an increasing number of states in the U.S. are legalizing weed.
One stock capitalizing on this mega-trend is Canada-based Aurora Cannabis (NYSE: ACB, TSX: ACB), which has been making news lately because of its aggressive expansion strategies.
Should you buy into the marijuana high, via Aurora Cannabis? Or will the stock take investors on a bum trip? Let’s see if the company is a solid investment or just another faddish headline maker.
What Is Aurora Cannabis?
Headquartered in Edmonton, Canada, Aurora Cannabis produces and distributes a wide variety of medical marijuana products.
The company’s products consist of dried cannabis and cannabis oil, CanniMed vegan capsules, and hemp products. The company also sells vaporizers, vaporizer accessories, and herb mills.
Aurora Cannabis (market cap: $5 billion ) operates in 22 countries and holds partnership agreements with several drug retail chains for the distribution, sale, and marketing of medical cannabis products. Aurora also operates CanvasRX, a network of counseling centers for marijuana medical treatment.
In October 2018, Aurora changed its OTCQX ticker symbol ACBFF to “ACB” on the New York Stock Exchange (NYSE), and continued to trade under ACB on the Toronto Stock Exchange (TSX).
How Has Aurora Cannabis Performed?
- Over the past 12 months, Aurora Cannabis has lost 19.9% compared to a loss of 7.2% for the S&P 500.
- Over the past two years, Aurora Cannabis has gained 196.5% compared to a gain of 11.1% for the S&P 500.
How Has Aurora Cannabis Performed In 2017/2018?
- In 2017, Aurora Cannabis gained 328.6% versus a gain of 9.4% for the S&P 500 (see chart).
- In 2018 year-to-date, Aurora Cannabis has lost 46.2% compared to a loss of 7.6% for the S&P 500.
Who Are Aurora Cannabis’ Rivals?
Canopy Growth (NYSE: CGC)
Based in Smith Falls, Canada, Canopy Growth grows and sells medical cannabis in Canada. Its products include dried flowers, oils and concentrates, softgel capsules, and hemps. The company offers its products under the Tweed, Black Label, Spectrum Cannabis, DNA Genetics, Leafs By Snoop, Bedrocan Canada, CraftGrow, and Foria brand names.
With a market cap of $9.1 billion, Canopy Growth garnered considerable media attention in August 2018, when beverage giant Constellation Brands (NYSE: STZ) paid $3.8 billion to boost its ownership of CGC to 38%, to help fuel Canopy’s development of new products.
GW Pharmaceuticals (NSDQ: GWPH)
With a market cap of $3 billion, GW Pharmaceuticals develops cannabinoid treatments. Through partnerships with Big Pharma, the company is marketing its Epidiolex multiple sclerosis treatment in more than 20 countries.
The company has other products in the pipeline, including therapies for glaucoma and schizophrenia, and a potential treatment for an aggressive form of brain cancer.
22nd Century Group (NYSE: XXII)
With a market cap of $302.9 million, this biotech focuses on genetic engineering and plant breeding and is developing a new strain of hemp with zero tetrahydrocannabinol (THC), the main psychoactive compound found in cannabis.
22nd Century Group also is creating genetically engineered tobacco plants with 97% less nicotine than conventional strains, as well as a strain high in nicotine that allows for the lowest tar-to-nicotine ratio in the cigarette industry.
Will Aurora Cannabis Go Up In 2019 (Should You Buy)?
Aurora Cannabis is vertically integrated and horizontally diversified, two advantageous qualities. The company boasts a growing footprint throughout the cannabis value chain, including agri-facility building and design, genetic breeding, plant cultivation, product development, and wholesale and retail distribution.
This video gives a quick tour of an Aurora Cannabis production facility:
Aurora Cannabis also benefits from its location in the Great White North.
Canada is the second country, after Uruguay, to legalize possession and use of recreational cannabis for all adults. Medical marijuana has been legal in Canada since 2001.
Canada’s approach differs from that of the U.S., where marijuana remains banned at the federal level but states are free to enact their own laws.
In the U.S., 30 states and the District of Columbia have legalized marijuana to some degree (see chart, current as of December 2018).
Source: Governing magazine.
Analysts expect demand for marijuana to surge in Canada, creating an acute shortage. Scarcity of weed should be manna for Aurora investors.
According to Ameri Research, the global legal marijuana market generated spending of $14.3 billion in 2016 and is forecast to grow at a compound annual growth rate of 21.1% between 2017 and 2024, culminating in 2024 revenue of $63.5 billion.
To meet this projected demand, Aurora has greatly expanded in recent months, buying other companies and building new facilities. Notably, on December 10, 2018 Aurora announced that it would buy its Mexico-based medical cannabis partner, Farmacias Magistrales.
Aside from providing entrée to the huge Mexican market, Farmacias is the only company so far that has a license to import, manufacture, store, and distribute medical cannabis that contains over 1% THC.
Financial details about the deal are sketchy. But through Farmacias, Aurora can provide Mexico’s consumers with non-flower medical cannabis products containing THC, which convey higher profit margins than the flower variety.
Will Aurora Cannabis Go Down In 2019 (Should You Sell)?
Thousands of thinly capitalized startup companies are trying to catch the legalization wave, but most are on the road to failure. Because marijuana is still illegal on the U.S. federal level, marijuana companies have scant access to even basic banking services, which makes it difficult to run a public company.
During the latter part of 2018, the broader stock market has wildly gyrated. Sharp sell-offs have been particularly hard on smaller pot stocks, which can spike up or down on even the whiff of bad news.
The exploding pot stock sector is poised for a brutal shakeout, as investor euphoria wears off and Wall Street comes to its senses about many small marijuana companies that have been bid to ridiculous heights on hype.
And yes, Aurora has been in expansion mode. Problem is, the company has been financing its acquisitions and infrastructure investments with common stock. The Farmacias deal in December is the fourth time in 2018 that Aurora issued common stock to facilitate the purchase of another company.
Share issuances hurt shareholders because they dampen the value of existing shares. In addition, a higher number of outstanding shares makes it more difficult for Aurora to achieve substantial earnings per share.
Overall Aurora Cannabis Forecast And Prediction For 2019
Aurora Cannabis’ operating results have been solid. For its full fiscal year 2018, Aurora Cannabis racked up revenue growth of 206% compared to the previous year. Net income moved to a profit of C$71.9 million from a loss of C$13 million in fiscal 2017.
The volume of cannabis that Aurora produced in 2018 jumped by 85% on a year-over-year basis to 5.6 million kilograms, while the amount sold grew by 111% YoY to 5 million kilograms
As industry tailwinds accelerate, especially in the company’s home country of Canada, Aurora’s revenue and earnings should remain on an upward trajectory in 2019.
As a mid-cap stock, Aurora occupies the valuation “sweet spot.” It’s small enough to confer outsized growth — the sort of growth that usually eludes Big Pharma blue chips. But Aurora is big enough to withstand the volatility that probably lies ahead in 2019.
Another enticing aspect of Aurora is its suitability as a takeover target. The fast-growing marijuana industry is consolidating; a major beverage or tobacco company could come along as a suitor, attracted not just by the company’s broad product portfolio but also by its entrenched foothold in Canada. America’s northern neighbor holds strategic value in the booming marijuana industry.
Aurora Cannabis isn’t for risk-averse investors; its rapid expansion funded via the issuance of common stock should give pause to conservative traders. But unlike many of its rivals in canna-business, Aurora Cannabis enjoys meaningful earnings and revenue growth.
John Persinos is the managing editor of Investing Daily.