The TSX index provides exposure to thousands of stocks across multiple sectors. However, just a handful of these stocks are positioned to deliver market-beating gains over time. Therefore, it’s essential to identify the companies that are fundamentally weak and avoid investing in them.
One such fundamentally weak TSX stock is Aurora Cannabis (TSX:ACB). Valued at a market cap of $445 million, Aurora Cannabis stock is down 99.5% below all-time highs. Let’s see why I believe it might be difficult for ACB stock to stage a recovery in 2024.
Aurora Cannabis is a licensed marijuana producer
Aurora Cannabis is a licensed marijuana producer. Canada legalized the recreational consumption of marijuana in October 2018, driving a spectacular rally in pot stocks, including Aurora Cannabis.
Between April 2014 and October 2018, ACB stock rallied over 2,000% as investors were bullish on its widening market share and accelerating top-line growth.
However, since legalization, Aurora Cannabis and its peers have faced a slew of industry-wide headwinds, including cannibalization from the illegal market, the slow rollout of retail stores, overvalued acquisitions, and rising competition.
All of these factors led to lower profit margins, massive write-downs, inventory losses, and significant cash burn rates. To offset its negative profit margins, Aurora Cannabis raised equity capital several times, diluting shareholder wealth in the process.
Back in 2019, Aurora Cannabis issued a press release where it emphasized it operates in 24 countries, making it one of the largest cannabis producers globally. But in the last five years, it has significantly scaled back operations and now has a presence in 15 cannabis markets.
Can Aurora Cannabis report consistent profits?
The primary aim of a company is to churn out profits and cash flows that can be reinvested into the business or distributed to shareholders. Sure, there are plenty of growth stocks that report losses, but investors eventually expect these companies to turn profitable at scale.
Aurora Cannabis is no longer a growth stock as its sales have fallen from $268 million in fiscal 2020 (ended in June) to $211 million in the last 12 months. Due to its slowing sales and profitability, Aurora Cannabis was forced to scale back operations and lower its cost base. Despite these efforts, it reported a net loss of $25 million in the December quarter.
Aurora Cannabis ended 2023 with $109 million in cash, but it burned through $71 million in the last 12 months. If it doesn’t turn profitable in the next 18 months, the company will have to raise equity capital again.
Can legalization in Germany bail out Aurora Cannabis?
Recently, the German government disclosed plans to reform marijuana laws, making it easier for medical marijuana patients to purchase cannabis. Germany may soon be one of the largest markets for cannabis producers, where Aurora Cannabis already claims to have a leadership position.
In fact, Aurora Cannabis stated it is “well-positioned to benefit from de-scheduling and potential recreational markets” in Germany.
However, there is no guarantee that expansion into Germany would help it boost the bottom line. For example, Aurora Cannabis would have to spend heavily to expand its manufacturing capabilities in Europe and fight off price competition from domestic players.
Aurora Cannabis is a high-risk bet with little to no upside potential. There are several other TSX stocks you can buy that offer a much better risk/reward profile.
