It remains extraordinary to me that many commentators, analysts and pundits continue to be in denial concerning the partnership strategy of Aurora Cannabis (ACB), which it very clearly has laid out.
They continue to suggest that Aurora is somehow struggling to attract partners that could invest in the company, when in fact management has stated a number of times it has no interest in trading control of the direction of the company for a big investment.
Hasn’t anybody paid attention to how that has worked out for Canopy Growth (CGC) and the billions it has received from Constellation Brands? I wonder if they regret taking the money now?
After Constellation took control of the board, it was only a matter of time before it made its move to get who they wanted to run the company. Aurora Cannabis sees this as a probable outcome of taking on a big investment from a giant company, and in its case where it has arguably the best management team in the business, it would be a disaster for shareholders.
Losing control of the business
In the case of Canopy Growth, there were some issues that were inherent in the top management that was very apparent in my view, especially the lack of expertise in the allocation of capital once the company received the cash infusion from Constellation.
Part of the problem there was the company, because of the billions it now had at its disposal, partially at least, stopped thinking and acting entrepreneurial, and began to operate in terms of an entrenched player. This resulted in it losing some of the edge it had in the earlier days of the business, and resulted in obvious confusion, as demonstrated in the contradictory statements made at times from its leaders.
At times the CEO would state the company’s strategy was to focus on the Canadian market in order to work out the kinks in the business in preparation for scaling it globally, and other times the idea of expanding globally as soon as possible was proferred.
It was also evident when different outlooks and statements were made after the removal of co-CEO Bruce Linton. Weak financials was offered as a reason for his removal, which was contradicted by Constellation Brands, which stated it wasn’t related to his firing.
The official reason for removing him was allegedly because Constellation believed it needed different leadership to bring it to the next growth stage. That doesn’t make a lot of sense when Canopy Growth and Bruce Linton were considered the faces of the cannabis industry. Since that time the sector has taken a beating because people believe wrongly, if Canopy Growth is struggling, the rest of the cannabis industry must be too. That’s wrong, but it’s the conclusion that has been drawn.
It has also given the bears an opportunity to put forth all their disaster scenarios, including in relationship to Aurora Cannabis, which has put significant downward pressure on its share price for now.
What matters is it’s readily apparent that there were two entities vying for the control of the direction of the company, and was the direct result of Canopy Growth opting for the billions in capital in exchange for board seats and a big stake in the company.
Without a doubt Aurora management understands the consequences of receiving a giant influx of cash in exchange for a stake in the company, and the accompanying board seats that would be expected to come with it.
The point here isn’t that there aren’t times when weak management needs to be replaced, but in the case of Aurora Cannabis, that isn’t the case, and that’s especially true now that it is close to achieving positive EBITDA.
Aurora’s outlook for partnerships
Aurora isn’t looking for the type of partnerships where it gives up control, it’s looking for deals that are complementary to each participant, and is able to leverage the strengths of each company to the benefit of one another. The recent partnership it entered into with UFC is a good example of that.
It’s obvious that Aurora Cannabis has a lot going for it, and giving up control would totally disrupt its business model and growth trajectory.
As key adviser Nelson Pelz has said, there is no need to take on a partnership that would be disruptive when the company is so close to positive EBITDA.
Nonetheless, some keep on beating the drum concerning the company needing to take on a larger partner in order to get an infusion of capital. In my view that would be among the worse things the company could do.
Aurora Cannabis has been very open and clear concerning the fact it isn’t interested in giving up shares and board seats in exchange for an investment from a big company.
Up until the firing of Bruce Linton, Canopy Growth was held up as the model for Aurora Cannabis to follow concerning that type of investment. You don’t hear a lot of that coming from the analysts and pundits now, even though some still refuse to acknowledge Canopy Growth is in disarray because of the conflicts over the future direction of the company concerning how it’s going to continue to grow.
In the near future I believe the business model of Aurora Cannabis is going to be vindicated, and when it starts to consistently generate positive EBITDA even as it boosts revenue, the overall market will finally start see how the company has positively differentiated itself from the rest of the cannabis pack, and will scramble to get in before the shares start to skyrocket.
The Consensus Verdict
Ultimately, Aurora Cannabis stock has landed 4 ‘buy’ ratings vs. 4 ‘hold’ ratings in the past 3 months. It’s clear that Wall Street is largely divided between the bulls and the fence sitters when it comes to Aurora’s market opportunity. That said, the consensus average price target points to USD$9.10, or nearly 40% upside potential for the stock. This suggests that by consensus expectations, for now, the bulls win on Aurora. (See ACB’s price targets and analyst ratings on TipRanks)
Disclosure: The author has a long position in Aurora Stock.