Aurora Cannabis (NYSE:ACB) is the second-largest marijuana stock by market cap, is projected to lead all growers in peak annual output with at least 662,000 kilos, based on company estimates spanning its 14 grow farms, and has a more diverse combined production and distribution presence than any other cannabis grower. And yet, I’m not a fan.
Despite nearly doubling its market cap since the beginning of 2018, Aurora’s share price has actually declined. This is the result of Aurora continuously diluting its shareholders by financing a multitude of acquisitions with its own stock and little, if any, cash component, as well as the company reporting relatively steep quarterly operating losses.
But for as much as I’ve suggested avoiding Aurora Cannabis as an investment, I do see paths where it could become worth buying. Here are three such scenarios that would make the most popular pot stock a buy…
1. A brand-name company makes a significant equity investment
Perhaps one of the biggest head-scratchers of all in the cannabis industry is that Aurora Cannabis is one of the few large pot stocks not to have landed a brand-name partner or equity investment as of yet. Despite reports of discussions between Coca-Cola (NYSE:KO) and Aurora in September 2018, no deal ever materialized.
My personal take on this is that Aurora’s penchant for acquisitions, and therefore its consistent issuance of new stock, would have diluted Coca-Cola, or any equity investor, after their initial stake. Even with anti-dilution rights in place, it would have made life difficult for a brand-name company, even one with pockets as deep as Coca-Cola, to maintain its equity stake in Aurora. This is the probable reason we haven’t yet seen a deal take place, and why Coca-Cola likely walked away.
Aurora did hire billionaire activist investor Nelson Peltz, the founder of Trian Fund Management, as a strategic advisor in mid-March. Peltz has keen knowledge of the food and beverage industry, and would potentially be the perfect person to bridge the gap between the food or beverage industry and the pot industry. Peltz’s hiring firmly suggests that Aurora is looking for its thus-far-elusive deal.
But landing a brand-name partner isn’t enough to make Aurora Cannabis a buy. It would need to secure a very sizable equity investment, more or less on par with what Cronos Group scored from Altria, to become a buy. This deal netted Cronos $1.8 billion in cash.
The simple point being that if Aurora were able to secure capital without having to regularly issue its common stock or convertible debentures, it could execute on its business strategy without burying existing shareholders. When this risk of significant dilution is off the table, Aurora can be considered as a possible buy…
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