We know that investing in cannabis companies carries significant risks. While the marijuana industry is still at a nascent stage and is expected to grow at a rapid pace, there are far too many structural issues impacting the sector right now.
Cannabis cultivation is capital intensive and requires huge amounts of investments. Marijuana companies need to produce thousands of kilos of cannabis at scale before they can be profitable.
Further, as cannabis is still illegal south of the border at the federal level, access to funds is an issue. This suggests pot companies need to keep raising equity capital to fund their loss-making operations, which then results in a dilution of shareholder wealth.
Cannabis is a highly regulated industry, and higher taxes in Canada have led to a thriving black market, which lure recreational customers with lower-cost products. The slow rollout of retail stores in major Canadian cities has also hurt demand for pot products. The COVID-19 pandemic did not help, and we can see why marijuana companies are down in the dumps.
Companies such as Aurora Cannabis (TSX:ACB)(NYSE:ACB) have seen their stock price decline by 96% in the last two years. Aurora Cannabis remains unprofitable and has raised equity capital multiple times in recent years. Further, lower-than-expected demand has resulted in million-dollar inventory write-downs, while Aurora’s overvalued acquisitions have led to a bloated balance sheet.
Let’s see if you should invest in one of the largest pot companies in the world right now.
Is Aurora Cannabis the ultimate contrarian bet?
Aurora Cannabis stock has been in a downward spiral for quite some time. The company announced its fiscal fourth-quarter results last month and reported net sales of $72.1 million, which suggested a sequential decline of 5%. Aurora forecast cannabis sales between $60 million and $64 million for Q1 of 2021, which indicates a decline between 5.3% and 11.2% compared to Q4 of 2020.
Though Aurora’s EBITDA loss narrowed to $34.6 million, the company remains miles away from profitability. Now, the company expects to report a positive EBITDA by the December quarter, but according to analysts, Aurora Cannabis might take three years to achieve sales volumes that would break even at EBITDA.
In the last quarter, Aurora Cannabis reported $1.8 billion in goodwill impairment charges, which means the company has grossly overpaid for acquisitions over the years.
The Foolish takeaway
Aurora Cannabis knows it is treading on thin ice and has to reduce cash burn. The company is focused on lowering operating costs and sold its one-million-square-foot Exeter facility as well as stopped construction on two of its largest projects. While this has led to a production cut of 40,000 kilos a year, Aurora will be able to optimize demand-supply inefficiencies.
Aurora Cannabis is valued at a market cap of $745 million, indicating a forward price-to-sales multiple of 2.4. Analysts expect Aurora Cannabis to increase sales by 13.4% to $316.2 million in fiscal 2021, and this growth is expected to accelerate to 41% to $445.7 million in 2022. However, right now, Aurora Cannabis needs to win back investor confidence by drastically improving profit margins and shoring up its balance sheet.
Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.