Aurora Cannabis Stock is a falling knife you do not want to catch

<p>It is safe to say that things are not so rosy for Aurora Cannabis (NYSE: ACB) stocks. Shares have fallen around 76% from their 52-week highs. In the last month alone, ACB has cratered around 31%, from $ 3.60 / share on November 5 to $ 2.48 / share at the end of December 4.

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Shares have recovered from their November low of $ 2.14 / share, but the Aurora Cannabis stock is clearly a falling knife. The guilty one? Capital crunch. Aurora burns through cash like no business.

Based on the latest finances (released November 14), operating cash flow losses continue to grow. For the quarter ended September 30, 2019 (Q1 FY2020), the company bled CAD 94.9 million (or $ 72 million). New financing and share issue mitigated the battle. But dilution and leverage are not sustainable solutions.

As we enter 2020, expect more economical maelstrom for Aurora. With this in mind, the company’s shaky future is by no means an invitation to buy at today’s prices.

Tough times for Aurora Cannabis Stock

For Q1 FY20, Aurora published disappointing results. Medical sales increased by 11%, but consumers’ net sales decreased by 33% from the previous quarter. Revenue as a whole decreased from CAD 98.9 million (USD 75.5 million) in Q4 2019 to CAD 75.2 million (USD 56.8 million) in Q1 2020.

In combination with the revenue release, Aurora announced Cannabis’ big plans to keep the ship afloat. The company made a deal to convert subordinated loans to a changed price. Aurora also ground the construction of the facilities in Aurora Nordic 2 and Aurora Sun.

On November 29, Aurora hit another chin. The German government suspended Aurora’s sales of medical marijuana in the county. The suspension will be lifted when the health authorities review Aurora’s extension methods for sustainability. The company expects sales to resume “very early” next year.

This development is bad news for Aurora. Before that, the company competed for its “distinct first-hand advantage” in Germany. But with its reputation damaged, the company may face more headwinds building up its European medical pot value.

The spread between production and sales continues to increase. During the fourth quarter of 2019, Aurora Cannabis sold 17,793 kg against 29,034 kg produced. But during the first quarter of 2020, the company sold only 12,463 kg, compared to 41,436 kg produced.

This month’s launch of “Cannabis 2.0” may help use threatening stocks. Sales of groceries, beverages and beverages are now legal in Canada. But capitalizing on “Cannabis 2.0” requires a huge investment. Without a strategic partner, Aurora has to bear the costs if they want a piece of the pie.

Fear of dilution comes to fear

In a previous analysis of the stock, I discussed the dilution risk. It turns out I had money. Last month, Aurora converted 99% of its CAD 230 million in outstanding subordinated loans into ordinary shares. Paying off the upcoming debt (due date in March 2020) was an important issue for investors.

The dilution was not massive (69.14 million shares) in relation to Aurora’s large number of shares (over 1 billion outstanding shares). But it sets a precedent for more dilutive measures. When losses increase and cash decreases, something must yield. So far this year, Aurora Cannabis has sold 29.06 million shares for a total revenue of $ 124.4 million.

Until the ACB reaches profitability, expect more dilutive capital raising. Even with its expansion plans scaled down, Aurora’s eyes remain larger than her pocketbook.

Aurora has run out of options. Unlike their peers Canopy Growth (NYSE: CGC) and Cronos Group (NASDAQ: CRON), they lack a deep-pocketed strategic partner. There are no Constellation Brands (NYSE: STZ) or Altria Group (NYSE: MO) waiting in the wings. Aurora hired Nelson Peltz to find them a partner, but so far it is still without a match.

Will Aurora find a sugar daddy to turn on the lights? Possible, but not likely. Aurora Cannabis can go the joint venture route a la Hexo (NYSE: HEXO). But until then, all games are closed if Aurora can handle the storm.

Conclusion: Avoid this falling knife

Aurora Cannabis is a dead layer. Or so it seems. Maybe the harvest with tax loss drives the latest sales. Coming to 2020, the ACB share price may pick up speed when investors place opposite bets on the company’s future. But when you look at the basics, it looks like pure speculation.

The Aurora stock price may be lower, but it is not a cheap stock. Trading with a company value / sales ratio of 13.8, Aurora is cheaper than the competitors Canopy Growth (EV / Sales of 19.5) and Cronos (EV / Sales of 29). But with Aurora’s poor capitalization compared to these peers, that discount may be justified.

So what’s the conversation? As with this other besieged pot name, Aurora Cannabis is too risky to buy. But stocks are even more risky in the short run. A bit of good news can send stocks up. Save yourself a headache and avoid the “potty bust” that is Aurora.

At the time of writing, Thomas Niel did not hold any position in any of the above securities.