Aurora (TSX:ACB) Stock Has Risen 100% Since its Q3 Results: Is ACB Stock a Buy?

Here’s why Aurora (TSX:ACB)(NYSE:ACB) stock is a risky buy, despite its recent upward surge.

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Shares of marijuana giant Aurora Cannabis (TSX:ACB)(NYSE:ACB) are trading at $17.75 on the TSX. Aurora stock has gained 136% since bottoming out in May 2020. Despite the recent surge in share prices, it’s still trading 86% below its 52-week high. The recovery in Aurora stock price was driven by the company’s better-than-expected quarterly results.

Aurora Cannabis announced its fiscal third-quarter 2020 results last month. It reported net revenue of $75.5 million in Q3 — a sequential growth of almost 35%. Aurora’s net cannabis sales were $69.64 million, up from $52.7 million in Q2. The company’s Q3 sales were driven by a 24% rise in recreational cannabis, while medical cannabis sales rose 13.5%. In Q3, Aurora sold 12,729 kg of marijuana compared to the sales of 9,501 kg in Q2.

Another major reason for Aurora stock’s upward spiral was its improvement in liquidity. The pot stock ended Q3 with a cash balance of $230.2 million. In the March quarter, it used $154.6 million in cash — a sequential decline of 43%. Further, company management also stated that Aurora might report a positive EBITDA in the first quarter of fiscal 2021 ending in September.

In 2020, Aurora has focused on reducing costs and improving gross margins, which will positively impact profitability.

What’s going wrong for Aurora stock?

We have seen that investors were buoyed due to Aurora Cannabis’s recent quarterly results. However, the company is still not out of the woods. While ACB’s gross profit stood at $31.9 million, it reported an operating loss of $83.6 million, as operating expenses stood at a massive $111 million.

Yes, Aurora is focused on reducing costs. However, its statement of reaching a positive EBITDA by September seems a bit far-fetched. In February, Aurora announced plans to reduce quarterly selling, general, and administrative (SG&A) expenses to between $40 million and $45 million.

In Q3, the company’s SG&A expenses were $75.1 million. While the high SG&A expenses can be attributed to one-time termination costs and Aurora’s business transformation plan, it will be a massive achievement if the marijuana giant can achieve its target of reporting a positive EBITDA in Q1 of 2021.

Aurora’s inventory levels are another cause of concern for investors. Several pot companies are grappling with lower-than-expected demand due to the slow rollout of retail stores. The COVID-19 pandemic also led to store closures of existing outlets, further weighing on demand. Aurora ended Q3 with an inventory of a massive $251.2 million. Its wholesale revenue was $0 in Q3, which indicates another million-dollar writedown is in the cards.

Aurora’s cash burn has diluted investor wealth, as the marijuana heavyweight continues to raise equity to remain afloat. Its board of directors recently authorized a US$350 million at-the-market offering and this will drag the stock lower.

Sluggish international sales and massive goodwill a dampener

While several international markets in Europe are relaxing marijuana laws, Aurora Cannabis has been struggling to grow its presence in these regions. In Q3, international sales for the company stood at $4 million. Comparatively, this figure stood at $4.6 million in Q1.

In Q2, Aurora Cannabis reported a goodwill writedown of $762 million. These were related to the company’s international assets in South America and Denmark. At the end of Q3, Aurora’s goodwill stood at $2.42 billion, accounting for 51% of total assets. Aurora grossly overpaid for the companies it acquired over the last few years. This means investors can brace for another massive goodwill writedown in the next few quarters.

While the recent results sent the stock higher, we can see that several issues continue to plague this cannabis behemoth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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