One of the worst-performing stocks since the start of 2019 is Aurora Cannabis. The Canadian marijuana giant is trading 96% below its all-time high, wiping off significant investor wealth in the process.
ACB stock has been impacted by multiple structural headwinds that include low margin products, slower than expected rollout of retail stores in large Canadian provinces, high inventory levels, a thriving black market, billion-dollar goodwill write-downs, overvalued acquisitions, and widening losses, among others. The COVID-19 pandemic exacerbated these factors resulting in a sustained sell-off in ACB stock.
But while the Canadian cannabis market has recovered in 2021, Aurora Cannabis continues to lose market share resulting in tepid sales growth.
In the fiscal third quarter of 2021 that ended in March, Aurora Cannabis sales were down 21% year over year at $55 million. Its recreational cannabis sales fell by 53% to $18 million while domestic medical marijuana sales declined by 17% to $36 million. Comparatively, peer company Canopy Growth increased medical marijuana sales by 30% to $75 million in the March quarter.
While Aurora Cannabis managed to reduce its EBITDA losses to $24 million compared to a year-ago loss of $49 million, the company is still far away from generating consistent profits. The cannabis heavyweight claimed that it will report an adjusted EBITDA profit within the next six quarters. However, it has been promising a road to profitability for more than two years and has failed to deliver on its promises.
Aurora Cannabis has focused on lowering costs via a facility rationalization program in the last year and has saved close to $300 million. In the next 18 months, it aims to lower costs by $60 million to $80 million.
At peak production capacity, Aurora Cannabis had 15 facilities and was on road to be the world’s largest marijuana producer. It could grow 600,000 kgs of marijuana each year. However, as cannabis is highly regulated, licenses to open retail stores in several provinces were delayed resulting in an oversupply of products.
Over the years, Aurora Cannabis aggressively acquired companies to gain traction across various segments. It paid a premium for these acquisitions that are recorded as goodwill on the balance sheet. At the start of 2020, Aurora’s goodwill stood at a staggering $3.17 billion. In the 18 months, the company has written down close to $2.8 billion in goodwill.
Due to unfailing losses, Aurora Cannabis had to constantly raise equity capital thereby diluting shareholder wealth. Its outstanding share count has risen from 1.3 million in June 2014 to 198 million in September 2021. As it is still reporting million-dollar losses and remains cash flow negative, shareholder dilution is a massive threat for investors.
We can see that Aurora Cannabis has tried to lower costs and manufacturing capacity by selling assets and restructuring. But it continues to burn cash at an alarming rate which means further equity dilution is on the cards.
Aurora Cannabis is looking to focus on high-margin medical marijuana products. But as seen above, it's losing market share in this segment too. It enjoyed an early mover advantage in the medical marijuana market but has not been able to dominate the segment.
Analysts expect Aurora Cannabis sales to fall by 8.4% to $255.5 million in fiscal 2021 and then rise by 23.7% to $316 million in 2022. It also means ACB stock is trading at a forward price to 2022 sales multiple of 5.34x which is steep for a loss-making company grappling with tepid revenue growth.