Stay away from Aurora Cannabis (NYSE:ACB) stock. There is little chance the company can make money. Investors are waiting to see how bad the results will be on Nov. 14, when Aurora will report its fiscal first-quarter results.
But don’t expect much.
Average selling prices for cannabis have been falling. This is partially due to the huge oversupply in Canada. The lower-priced black market for weed is also a factor.
In addition, Aurora is on a huge expansion program that is causing the company to blow through its remaining cash. ACB’s cash burn is so high that the company is going to have to take on additional debt.
Another take on Aurora’s problems is that the company is simply building too many greenhouses. Basic cannabis demand is not enough. Moreover, lower black market prices are hurting prices for legal sellers. I wrote about this in my last article on Aurora Cannabis stock. I also wrote about how the company’s cash burn is using up all of its liquidity.
As of June 30, Aurora had only $219 million CAD in cash on its balance sheet. But its free cash flow was negative $607 million CAD in the last fiscal year ending June 30.
That implies that Aurora may have to borrow money to fund its cash burn. According to Cornerstone Investments, banks have already turned down a publicly held cannabis company’s request to build an additional facility. That means there is no guarantee that Aurora can actually fund its present cash burn rate.
Aurora Cannabis Stock Is Overvalued
ACB stock is still overvalued, even though it is off 65% from its 52-week high. At a market capitalization of $3.8 billion, Aurora Cannabis stock is over 9 times its last fiscal year’s revenues. Given its lack of profitability, there is little chance that Aurora stock will rise any further.
As a result, Aurora Cannabis may find it very difficult to raise equity capital at today’s prices. This could force it into a slowdown of capital spending, borrowing more money or selling assets.
Investors will be watching the average selling prices, margins and operating cash flow on Nov. 14. Analysts will also scrutinize the balance sheet. They want to see if there is liquidity to fund the cash burn rate of the past year.
Debt and Asset Sales Funding Losses
For example, Aurora Cannabis announced on Sept. 9 it