Analysts identified the biggest risk to the Aurora Cannabis (ACB) story as the company aggressively spending the business towards a liquidity problem. The global cannabis company is building for a massive global opportunity, but still burning cash at a rapid rate. The market recently pushed the stock below $4 hoping for the industry to rationalize supply and spending around current revenues, but the October corporate update from Aurora Cannabis suggests the company remains tone deaf to the current market realities.
Major Facility Construction
Aurora Cannabis has been on a major facility construction path over the last few years. The company updated the market on the construction progress, but Aurora Cannabis still appears focused on global market leadership over prudently managing investors’ capital.
The cannabis company spent C$414 million on capital spending in the last fiscal year alone causing analysts like Chris Carey from Bank of America to question whether the company will have liquidity issues in 2020. The latest update highlights how the majority of facility spending has passed, but the news suggests a ramp in operating expenses on the horizon.
Both the Aurora Sky and the Nordic Sky cultivation facilities are nearing completion adding a total of 2.6 million square feet of production space. Aurora Cannabis already had quarterly production targeted for 37,500 kg in the September quarter and these two massive facilities will increase quarterly production goals to nearly 175,000 kg by mid-2020.
Other facilities like the Anandia Laboratories and Canadian Cannabis Innovation Center are opening during the current quarter. The new facilities add over 45,000 square feet of cultivation, lab and office space that will add substantially to operating costs without contributing to near-term revenues.
On top of this, the company is testing outdoor cultivation at multiple sites in Canada. In addition, the company is also developing the Aurora Polaris park for industrial-scale production of edibles and vape products with those costs ramping up in October for the market opening up in mid-December.
Mismatch With Financials
While the company is busy focusing the market on either the organic, medical or global cannabis markets via sophisticated facilities and testing operations, Aurora Cannabis dumped C$20 million in revenues on the wholesale bulk market last quarter. The building of all these facilities wasn’t undertaken to sell product on the cheap in the wholesale market.
The mismatch with the actual sales figures and relatively weak margins in the upper 50% range is why the stock now trades under $5. The corporate update still has the company focusing on volumes including the planting of 9,000 acres of hemp in Eastern Europe versus generating positive cash flows and reigning in growth to better match global growth opportunities with escalating costs.
Unsurprisingly, we can see that best-performing investors have Very Negative sentiment on Aurora stock right now according to TipRanks Smart Portfolio.
Meanwhile, TipRanks reveals ACB as a stock that has not drawn a vote of confidence among Wall Street opinion. Out of 11 analysts polled in the last 3 months, 3 are bullish on the stock, 6 remain sidelined, while 2 are bearish. (See ACB’s price targets and analyst ratings)
The key investor takeaway is that Aurora Cannabis appears full speed ahead with massive production and cultivation growth. In none of the numerous notes about facilities or global operations did Aurora Cannabis actually discuss reigning in production for disappointing global demand.
Considering the legitimate questions on cash, the stock is likely to fail in a rally back above $5 where the market value would top $5 billion when the company is only expected to reach FY20 sales of $437 million now.