Aurora Cannabis Stock – What You Need to Know
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The frenzy to invest in cannabis stocks continues as companies scramble to raise as much capital as possible under the most favorable terms. Never mind the herd of investors who are generating so much hype that it’s starting to make ICOs look tame. We continue to get in front of this train to talk some common sense into the newbie investors who may have no idea what they’re getting themselves into. We’re largely talking about people who have never invested a penny in the stock market before, and think that now is the time to bet the farm on a cannabis stock or two. Some criteria that an amateur investor might apply when looking for cannabis stocks to invest in include:
- Stocks that are easy to access through any broker – Right now, most cannabis stocks trade on Canadian exchanges.
- Stocks that are big – In the investing world, bigger isn’t always better when “bigger” can happen in days as stocks sore to incredibly high valuations. With that said, it’s usually less risky to invest in larger companies, generally speaking.
- Stocks that media pundits like Cramer like to blabber on about – When stocks are constantly talked about, names stick in people’s heads.
There’s a stock that will soon meet all three of these criteria, and it’s called Aurora Cannabis.
A Vertically Integrated Cannabis Producer
Given that Aurora Cannabis (TSE:ACB) is a $12 billion company at the moment, we were surprised to find out that we’ve never actually taken a look at what they do in all of our past articles on investing in cannabis stocks. Last time we came across Aurora Cannabis was just outside of Odense Denmark where we had a look at their developing grow operation – a switch from tomatoes to marijuana – as we smoked our way through Europe to bring you our piece on Smoking Recreational Cannabis in the European Union. So, what is it exactly that Aurora does?
“Medical cannabis shouldn’t be costly, inconsistent, or difficult to access” says the first line you come across on their website, leading us to believe that they’re positioning themselves as a nurturing provider of soothing “marijuana medicine” as opposed to the company that sells packages of bubonic chronic to your kids which they smoke behind the gym while skipping class. (Now that Canada has become the only country after Uruguay which has completely legalized marijuana, does it really matter anymore?)
Regardless of positioning, Aurora Cannabis is a vertically integrated cannabis producer that plans to grow a lot of cannabis for patients and youth alike. Here’s the second slide in their latest investor deck which forecasts a production capacity of at least 570,000 kilos a year of cannabis by the end of 2019:
Let’s do some back-of-the-napkin math on these numbers to get an idea of what sort of revenues we might expect from an operation that plans to produce and sell more than 628 tons of cannabis per year. Canada’s best government statisticians put the price that licensed producers can sell for at around $7 Canadian dollars a gram or $5.34 USD per gram. That means that at full production, and provided that Aurora Cannabis was able to sell all that they produced, they could manage to bring in revenues of – we’re going to switch to U.S. dollars now – $3 billion a year. This, of course, assumes that Aurora Cannabis can sell all of the weed that they produce.
In our article on how the Canadian Weed Industry is Ready to Start Smoking, we learned that Canadians as a whole smoked their way through 635,000 kilos of weed in 2018. This means that Aurora Cannabis plans to produce almost as much weed as all of Canada consumes at the moment. And we haven’t even considered how much other large growers like Canopy Growth are producing or what’s being grown on the black market. Basic economics would lead us to believe that the price-per-gram might be falling quite a bit based on such a large supply increase. Maybe we can gain some more insights by looking at how much weed Aurora Cannabis is selling today.
Aurora Cannabis Today
Here’s a statement from the latest financial filing by Aurora Cannabis:
During the year ended June 30, 2018, the Company’s biological assets produced 5,631,913 grams of dried cannabis (2017 – 3,036,829 grams).
While these numbers sound pretty big, we need to divide them by 1,000 to get to kilos. That means that in 2018, Aurora Cannabis produced 5,631 kilos of cannabis compared to 3,036 kilos in 2017. At that rate, it’s going to take a while before they get to their estimated 570,000 kilos of peak production capacity.
Revenues for Aurora Cannabis in 2018 came to around $41.2 million USD, but they’re hardly profitable having spent over $32.8 million in General and Administrative costs alone during 2018:
To fund their operations, the company has been borrowing money and issuing new shares. Outstanding shares increased from 366.5 million to 568 million during 2018, an increase of around 55%. Can you say shareholder dilution? Of course, bulls will point to their international dealings as areas of future growth, along with all the mergers and acquisitions that have been happening. That’s all fine and dandy, but do investors realize how richly priced the stock is at the moment? This is the sort of company that Aurora Cannabis keeps with their $12.5 billion valuation:
The above chart was originally used in our recent article titled Buying Marijuana Stocks in 2018 – Is it Too Late? In that article, we looked at how highly-valued Canopy Growth was. Turns out we can just replace the name “Canopy” with “Aurora Cannabis” and the message is still the same. Aurora Cannabis is valued as much as some of the most popular consumer brands out there. In order to stop burning through cash and demonstrate the sort of great margins that “producing at less than $1 Canadian a gram” will bring, we need to see more weed grown and more weed sold – lots more.
A Little Something Called Arbitrage
Whether or not people believe that Aurora Cannabis will be able to sell 561 tons of weed in 2020, they do need to be wary about purchasing shares of Aurora Cannabis stock once they begin trading on the New York Stock Exchange (NYSE) next week. This is because of a phenomenon that can often take place when a stock starts to trade on a foreign exchange, especially with stocks that get as much attention as Aurora Cannabis does. It’s a little something we call “arbitrage”, and it’s an excellent reason for investors to stick with buying Aurora Cannabis stock on the Canadian Exchange only.
Simply stated, arbitrage says that two instruments that trade on different exchanges should always have similar values otherwise someone’s paying too much for their shares. Let’s take the case of Aurora Cannabis which plans to begin trading on the NYSE in just a few days’ time. Here’s what Aurora Cannabis had to say about their dual listing:
Aurora’s Common Shares trade on the TSX under the symbol “ACB”, and are a constituent of the S&P/TSX Composite Index. Beginning October 23, 2018, Aurora’s Common Shares will also trade on the NYSE under the symbol “ACB”.
Conclusion
If you buy one share of Aurora Cannabis stock on the Canadian exchange at today’s closing price of $13.01 Canadian dollars (CAD), then you would have paid $9.94 United States greenbacks (USD) for one share of Aurora Cannabis. Now, let’s say someone wanted to sell you a share of Aurora Cannabis today for $11.00. You’d tell them to go pack sand because you can buy a share of Aurora Cannabis today for $9.94. So, when shares of Aurora Cannabis begin to trade on the NYSE, they should be trading at roughly the same price that the Canadian shares are trading at. Of course, we all know how volatile Canadian cannabis stocks are right now, so you’re better off just remembering these simple rules:
- Multiply the price of one share of Aurora Cannabis stock on the NYSE by 1.3.
- If that number is greater than the number you see at this link, then you’re paying more to buy Aurora Cannabis stock than you should. In other words, you can buy it for cheaper by just purchasing shares on the Toronto Stock Exchange.
- Regardless of how high cannabis stocks soar or how low they crash, you should never pay more for shares if you can buy them cheaper somewhere else.
Share
Since this article in Oct 2018 the stock collapsed to $0.82, now it is $1.09, market cap: $358M (in USD).
At the top ACB share was worth $130 in Jan 2018.
However the management is doing a turnaround and promises Q4 results (due next week) will be EBITDA positive.
Also they have cash near equal to its market cap. So from the current price point a big upside is possible.
I think Aurora Cannabis deserves a new article now ..
Please note that our focus going forward is on U.S. MSOs so this probably won’t receive an updated piece.