If there is any business that you’d think would be an easy buck, it would be marijuana. A year ago, the march toward legalization looked like the end of liquor prohibition in the United States, great for those licensed to produce the stuff, but the end to fat profits for those with inferior weed.
Many who bought this story in the case of Aurora Cannabis (NYSE:ACB) are getting tired of waiting. The shares have plunged 32% just in the last month and opened Nov. 26 at $2.45 each.
Even at that price, the company has a market capitalization of over $2.6 billion, on trailing-year sales of $248 million. It’s cheaper than it was, but it’s not cheap by any conventional measure.
What Went Wrong?
Like its rivals in the bud biz, Canopy Growth (NYSE:CGC), Cronos Group (NASDAQ:CRON), Aphria (NYSE:APHA) and Tilray (NASDAQ:TLRY), Aurora figured 2019 would be the year the dam burst open. Canada had made cannabis legal in 2018. It was legal in California. Other U.S. states were marching in the same direction. By now, it figured, everybody must be getting stoned.
Then second thoughts happened. Canada’s national government legalized weed, but the provinces control the industry, and they have slow-walked the necessary regulations. In California, illegal sellers still have most of the market. Illegal growers do, too.
Illinois, wary of letting guys in suits clean up while poor people languish in jail, has also slow-walked the opening of legal weed shops. New York and New Jersey’s legislators refused to join the legalization parade.
By June, Aurora was still sitting on $316 million in cash and short-term investments, but $383 million in yearly losses. The only thing to do was cut the cash drain, delaying new production. The stock got hammered.
Other pot stocks were doing much the same. MedMen (OTCMKTS:MMNFF), a retailer, cut 20% of its workforce and scaled back. The rush of investors out the door became general. Canopy insisted its losses of $20 million weren’t as bad as they looked. Investors didn’t buy it.
Derivatives like CBD oil were supposed to be a bridge to the legal future, but that’s not happening either. Aurora stock has blown through several “must hold” points, and bulls have thrown up their hands.
What Happens Now?
For Aurora and other pot producers, these are desperate times. Greenhouse construction is being suspended, prices on convertible shares are being dropped in hopes of turning debt into equity. Cash is king.
While InvestorPlace’s Luke Lango believes the pain will be worth it, the next step is certain to be consolidation. Mergers should be coming, as those with adequate capital look to gain scale and lower per-unit costs.
We’ve seen this in the shale oil arena, and it’s not pretty. There’s no rush to buy, and a lot of players go bankrupt waiting for a buyer.
The Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) of this oil slick are Canopy and Cronos. Canopy has Constellation Brands (NYSE:STZ) behind it. Cronos has Altria (NYSE:MO), which paid $1.8 billion for a 45% share near the top of the market last year.
The Bottom Line on Aurora Stock
Aurora needs to drastically lower its cash burn and hope the market picks up next year, either for legal weed or derivatives like CBD oil. The cavalry, in the form of full legalization across the United States, is unlikely to arrive before 2021.
Canopy and Cronos will be doing much the same. Nobody is buying until the bottom looks to be in sight. And no company is being bought for real money until the mess of those that are bankrupt gets cleaned up. For Aurora shareholders it’s going to be a long, cold winter.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.