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I am neutral on the stock. (See ACB stock charts on TipRanks)
Earnings
Aurora Cannabis recently released its second-quarter earnings. Revenue decreased by 19.9% year-over-year, with a 45% COVID-induced plunge in consumer sales being the predominant driver behind the earnings decrease.
On the bright side, the legal-cannabis pioneer managed to narrow EBITDA losses by C$13.9 million, a C$17.6 million improvement from last year. Aurora also added C$404.3 million in working capital since last year, and now holds cash & short-term investments worth C$440.9 Million.
Valuation
Valuation methods suggest that the stock is currently trading at its fair asset value.
An asset-based valuation finds Aurora’s fair value to be $6.36, which contradicts the suggestion from its value multiples that the stock is undervalued.
Aurora’s trailing price-to-book ratio is 78.2% better than the industry average, while its trailing price-to-sales ratio is 26% better than the industry average.
These could, however, be part of a value trap.
Aurora has a cost of capital of 18.5%, with a negative earnings yield (240.4%), and a negative return on invested capital (14.2%).
These exceptionally disappointing pricing numbers indicate that the stock should have a negative value as things stand.
Technicals
Optimists will most likely look at the price-to-book and price-to-sales ratios, and a recovery in consumer sales, but the technicals suggest that Aurora is set to trade flat.
The RSI (Relative Strength Index) reads at 49.4, meaning the stock isn’t near the oversold benchmark (below 30). The volume also remains flat, which means an abrupt change in direction for the stock price is out of the question.
U.S. Cannabis Appeal
A new systemic risk for Aurora is the appeal of U.S. cannabis stocks. U.S. cannabis companies are still at earlier legal stages than Canadian stocks, but it’s anticipated that deregulation under individual states will continue, which will provide support to U.S. cannabis stock prices.
U.S. cannabis ETFs are becoming increasingly popular as they aim to take advantage of the cannabis space at an early stage. The individual stocks themselves are still challenging to access, as they’re predominantly penny stocks with low supply, thus the ETF hype.
Wall Street’s Take
Wall Street thinks Aurora is a Moderate Sell, based on six Holds and four Sells assigned in the past three months. The average Aurora price target of $6.35 implies downside potential of 6.6%.
Final Word
Aurora is anticipated to remain flat for the time being. There are no specific identifiers that indicate a price move in either direction.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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