It might be mid-winter, but cannabis stocks are enjoying another extended moment in the sun. The Democrat led Senate has made it clear marijuana reform is in the cards, and Senate leaders have recently taken the first meaningful strides toward putting together a new bill to legalize cannabis at the federal level.
Investors have taken this as a sign to push shares of marijuana companies higher, amongst them is Aurora Cannabis (ACB).
ACB is up by a strong 79% year-to-date. But has there been a fundamental change in the company’s fortunes to merit the surge?
Aurora’s struggles have been well-documented; Displaying stagnant growth and burning cash at an alarming rate, the company has constantly diluted shares to raise extra money and has failed to live up to early expectations.
With Aurora scheduled to report F2Q21 results on Thursday after the bell, Needham analyst Matt McGinley remains skeptical that a meaningful turnaround is in the cards.
“While we expect details on the implementation of ACB’s strategic refocus (premium and extracts, creating a more variable production model, and aligning sales and marketing efforts around the new strategy), we don’t expect to see much (if any) impact from these initiatives in 2Q financial results,” said the 5-star analyst.
So, what can go right to alter the narrative?
“Premium strategy works and consumer revenue grows with the market, GM rate improves, G&A dollars remain flat, and EBITDA pushes positive,” says McGinley.
And with the company now boasting over 1,400 retailers vs less than 700 at the start of 2020, growth could “improve as COVID disruptions dissipate in 2021.”
Conversely, the slide won’t be halted if much of the same issues remain. These include continued FCF losses, more EBITDA losses, slower growth than the rest of the industry and the supply continuing to outstrip demand.
And although liquidity problems have been addressed for now with another recent equity issuance, which has “bought time to implement its strategy,” there is another issue investors need to take into account.
The recent surges of Aurora and fellow Canadian cannabis producers’ stocks are possibly misguided; While U.S. federal reform will almost certainly happen over the next couple of years, the changes will mostly be beneficial for the local MSOs (multi state operators), not for the players from north of the border.
“As such,” McGinley summarized, “It is critical that this business be placed on a sustainable path, as hopes for new market access are little more than a pipe dream at this point, in our view.”
All in all, then, McGinley retreated a Hold on ACB shares without suggesting a price target.
The rest of the Street aren’t convinced in an ACB turnaround, either. The analyst consensus rates the stock a Moderate Sell, based on 8 Holds and 4 Sells. At $9.02, the average price target suggests shares will be changing hands at a 39% discount a year from now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.