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Shares of marijuana giant Aurora Cannabis (TSX:ACB)(NYSE:ACB) fell over 50% in September 2020. The stock is currently trading at $6.25, which is 92% below its 52-week high.
Aurora Cannabis continues to burn massive wealth and has been one of the worst-performing stocks among pot peers. Let’s take a look at what drove the stock’s recent decline.
Poor quarterly results
Aurora Cannabis announced its fiscal fourth quarter of 2020 results last week and reported net sales of $72.1 million — a decline of 5% compared to Q3 of fiscal 2020. Aurora’s sales were also lower than analyst estimates of $79.6 million.
Further, Aurora forecast cannabis sales between $60 million and $64 million for Q1 of 2021. This represents a sequential decline between 5.3% and 11.2%. Investors were unimpressed about Aurora’s consecutive quarters of revenue decline, resulting in a 30% drop in stock price on September 23.
Aurora Cannabis also reported an EBITDA loss of $34.6 million, which was lower than its loss of $50.4 million in Q3. While the company’s loss narrowed, Aurora has previously targeted achieving a positive EBITDA by Q1 of 2021. This forecast has now been pushed to the second quarter.
Aurora’s stock decline in September could have been worse, as it gained 15% a day before its quarterly results due to an analyst upgrade. Jeffries analyst Owen Bennett upgraded Aurora from “underperform” to “hold” but slashed its 12-month price target by 40% to US$6.53
Further, Bennett expects Aurora Cannabis to face liquidity challenges due to negative profitability, which will mean the company will have to raise additional capital and dilute shareholder wealth yet again.
A tough road ahead for Aurora Cannabis and investors
Last year, Aurora Cannabis had 15 production facilities, which meant it could grow 600,000 kg of cannabis per year at peak capacity. This gave it access to two dozen international markets, and investors thought the company would benefit from economies of scale and international expansion.
However, in 2020, the pot behemoth has shut five small facilities and sold a one-million-square-foot facility to cut costs and lower cash burn.
In the June quarter, Aurora Cannabis reported a staggering $1.6 billion in goodwill impairment charges due to overvalued acquisitions it made in the last few years. At the end of September 2019, the company’s goodwill was $3.7 billion and has since declined to $928 million, still accounting for 33% of total assets.
Another matter for concern is Aurora’s shareholder dilution. As it remains difficult for loss-making companies to raise debt, Aurora has relied on selling equity to raise capital. After accounting for its reverse stock split, Aurora’s share count rose a massive 80-fold from 1.3 million shares in 2014.
The Foolish takeaway
There are several fundamental issues surrounding Aurora stock. It is a loss-making company that is also struggling with falling revenue. Aurora is losing market share and is now repositioning itself in the Canadian consumer market by focusing on premium products, which will also boost profit margins.
However, its glaring unprofitability, weak balance sheet, and the threat of further shareholder dilution will continue to impact the stock in the near term.
