Better Know a Marijuana Stock: Aurora Cannabis
The 800,000 square foot Aurora Sky project could make or break this pot stock.
(TMFUltraLong)
Updated: Oct 24, 2017 at 3:43PM
Published: May 5, 2017 at 8:02AM
A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and investment planning. You'll often find him writing about Obamacare, marijuana, drug and device development, Social Security, taxes, retirement issues and general macroeconomic topics of interest. Follow @TMFUltraLong
This article was updated on Oct. 5, 2017, and originally published May 5, 2017.
Marijuana stocks are on fire, and growth in the legal weed industry certainly has the attention of investors.
According to cannabis research firm ArcView, legal pot sales in North America jumped 34% in 2016 to a record $6.9 billion. Per ArcView, sales of legal weed could grow to reach nearly $22 billion by 2021. A similar bullish sentiment is shared by investment firm Cowen & Co., which believes legal marijuana sales could hit $50 billion by 2026. With ArcView estimating that $46.4 billion in cannabis sales last year came from the black market, there's ample reason to believe that legal channels can lure in these under-the-table consumers in the years to come.
There are dozens of marijuana stocks that investors can choose from. But with emotions running high, investors may be buying into pot stocks for all the wrong reasons, or worse yet, without understanding the risks they may deal with by buying into incredibly volatile marijuana stocks.
With this in mind, we're going to take the time to analyze one marijuana stock each week until all of the bigger legal weed players have been covered (i.e., those with market caps of $200 million or more). Here are the companies we've discussed so far:
Insys Therapeutics
Aphria (OTC:APHQF)
Today, we're going to take a closer look at Aurora Cannabis (NYSE:ACB).
What Aurora Cannabis does
Aurora Cannabis is a licensed producer and retailer of medical marijuana in Canada, with the company citing approximately 16,400 active registered patients as of its fourth-quarter earnings report in late September. As a reminder, Canada legalized the use of medical cannabis for patients all the way back in 2001, so it's had an established medical weed industry for more than a decade.
Aurora Cannabis main production facility at the moment is a 55,200 square foot facility in Mountain View County, Alberta. However, as we'll discuss in a few moments, it has two additional grow facilities in the works.
Promise and opportunities
Prime Minister Justin Trudeau has been campaigning for the legalization of recreational marijuana for years, and it appears 2017 may finally be the year when legislation passes to make this a reality. If Canada's government agrees, weed could be legal throughout Canada, as opposed to certain cities and locales, by Jul. 1, 2018.
Aurora Cannabis has been very clear that it intends to shift some of its production to the rapidly growing recreational side of the equation if Canada's maple leaf turns green in the months to come. For added context, the Canadian government has estimated that recreational weed could add $5 billion to $7 billion in revenue per year.
Secondly, and as alluded to above, Aurora Cannabis has a number of key projects underway that could see its production expand at just the right time. It completed the acquisition of a 40,000 square foot facility from Peloton Pharmaceuticals in April, and the facility, which was in the late stages of construction when purchased, should be capable of up to 3,900 kg of high-quality cannabis production by the second half of 2017.
More importantly on the expansion front, Aurora Cannabis is constructing the Aurora Sky project, an 800,000 square foot facility that it claims will be the largest and most technologically advanced cannabis production facility in the world. At full capacity, it's expected to generate 100,000 kg of cannabis a year! Aurora Sky remains on track and budget.
We're also beginning to see improvements in the company's operating results, despite most of its production having not yet come online. The company's fourth-quarter results showed a 15% increase in sequential quarterly sales from the third quarter, as well as a nearly 10% reduction in its cash cost per gram of dried cannabis. Long story short, sales and operating efficiencies are on the rise, and Aurora has plenty of working capital to complete its audacious Aurora Sky project.
Risks and concerns
Of course, no pot stock is perfect. Here are some of the risks and concerns investors should be aware of.
To begin with, Aurora Cannabis isn't alone in the medical marijuana industry in Canada. Aphria, which we looked at last week, is in the midst of expanding its production square footage from 300,000 to 1 million with its $100 million Phase IV expansion. This expansion is expected to be completed sometime next year, which is around the same time that Aurora Sky is expected to finish construction.
Meanwhile, Canopy Growth Corp. (NYSE:CGC) already has 665,000 square feet across six production facilities thanks to its organic growth and the recently completed acquisition of Mettrum Health. One would think that there would be more than enough demand to go around if Canada moves forward with legalizing recreational pot, but Canopy Growth's clear production capacity advantage may lend it some advantages over Aurora Cannabis.
Another concern that all marijuana stocks deal with is politics. Trudeau has been pledging to legalize recreational weed for years without any success, while in the U.S. we've witnessed the American public's opinion of marijuana soften and Congress' views on pot go absolutely nowhere. If anything, President Trump and U.S. Attorney General Jeff Sessions could prove tougher on recreational cannabis than the Obama administration. There simply are no guarantees when it comes to politics, and it's difficult to predict how politics could impact these companies in the future.
Aurora Cannabis' valuation is a concern, too. The company only has 55,200 square feet of production, and it's still losing money and relying on bought-deal financing to fund its operations. A market cap of approximately $902 million is a lot to pay for a company only doing a little over $1.5 million in sales a month for the time being.
Should you buy Aurora Cannabis?
Now for the most important question: Should you buy Aurora Cannabis?
On one hand, there's a clear indication that pot demand will be there if Canada legalizes recreational marijuana, and Aurora's organic build with Aurora Sky and acquisition from Peloton will come online at just the right time to meet this demand. Aurora has plenty of working capital, and Canada appears closer than it's been in years past to moving forward with legalizing recreational cannabis.
Then again, competition remains fierce, and there are bigger players that can beat Aurora Cannabis to market. There are also no guarantees that Canada legalizes recreational pot, or that this stock can live up to its already frothy valuation.
My suggestion would be to add Aurora Cannabis to your radar and monitor the progress of Aurora Sky and the company's overall bottom line. If Aurora Sky stays on budget and on-time, and Aurora swings to a nominal full-year profit, it could be worth a closer look for highly risk-tolerant investors.
NYSE:ACB
Aphria Inc.
OTC:APHQF
Canopy Growth Corp.
NYSE:CGC
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