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Shares of marijuana giant Aurora Cannabis (TSX:ACB)(NYSE:ACB) rose by a staggering 180% in November 2020. Investors were hopeful that cannabis will be legalized south of the border after Joe Biden won the presidential race.
Further, five states in the U.S. also legalized cannabis for either recreational or medical use last month, which drove shares of Aurora Cannabis and peers higher. Despite these stellar gains, Aurora stock is still trading 92% below its all-time high.
Will the stock continue to surge higher in 2021 and beyond?
Aurora Cannabis is still grappling with structural issues
Aurora Cannabis has been one of the worst-performing pot stocks in the last two years. It has been impacted by negative profit margins and severe cash burn. In fiscal 2020, Aurora Cannabis reported a net loss of $2.5 billion due to inventory write-downs and goodwill impairments.
This shows the company has been impacted by lower-than-expected demand and overvalued acquisitions, which meant the marijuana giant had to raise equity capital multiple times, which diluted shareholder wealth significantly.
In the September quarter, Aurora Cannabis posted a net loss of $107.2 million but is on track to generate a positive EBITDA in the December quarter. However, Aurora Cannabis is likely to reach a positive EBITDA on the back of cost-cutting efforts rather than revenue growth.
What’s next for ACB stock investors?
In the September quarter, sales of Aurora Cannabis were down 10% year over year to $67.8 million. It sold 16,139 kg of cannabis in Q1, up from 12,463 kilograms in the prior-year period.
However, the price of dried cannabis fell from $5.68 per gram to $3.70 per gram due to oversupply issues and rising competition in the marijuana space. In the last 12 months, Aurora has sold 64,500 kg of dried cannabis, which is much lower than its annual production capacity of 187,500 kg.
This meant it had to close several cultivation facilities and write-down the value of subsidiaries it previously acquired. Aurora’s total assets have fallen from $5.6 billion to $2.8 billion in the last year, and goodwill still accounts for a significant portion of these assets.
Yesterday the stock fell over 17% after the Canadian Press reported Aurora is laying off 30 workers and indefinitely pausing operations at one of its Albertan facilities. According to a CanadianManufacturing.com report, Aurora said the pause in production is necessary to “ensure all of its operations are a fit for its current and future business and to help the company adjust to recent shifts in the industry.”
In CY 2020, Aurora shut down production at five Canadian facilities and laid off 700 workers to improve the bottom line.
The Foolish takeaway
We can see that Aurora’s stock gain last month is not sustainable, and it might move lower by the end of December. Aurora Cannabis needs to improve both revenue growth as well as profitability to help it sustain operations and expansion programs.
There are multiple fundamental problems impacting Aurora Cannabis, and investors should brace for further rounds of dilution in the upcoming months given the company’s massive cash burn rate.
