Valued at $7.3 billion in market capitalization, and holding the title of Canada’s second biggest marijuana company, Aurora Cannabis (ACB) gets a lot of attention on Wall Street, where 13 analysts vie to cover the company’s comings and goings.
Actually, make that 14. Because this week, Compass Point analyst Rommel Dionisio joined the club, and initiated coverage of Aurora Cannabis stock with a Neutral rating and a 12-month price target of $8.00. (To watch Dionisio’s track record, click here)
Dionisio explained that “with approximately 20% market share in both the recreational and medical use markets,” Aurora is “well positioned to benefit not only from the legalization of cannabis for recreational use last fall, but also the scheduled expansion of the market later this year to include advanced delivery forms such as vapes and edibles, which generally carry higher profit margins” — both at home and abroad.
Around the world, but especially in Europe and South America, more than 35 countries now permit at least the medical use of marijuana among their populations. Aurora Cannabis, with its “early presence” in these markets, is positioned to take a leading role in supplying them with legal cannabis products as adoption rates increase and more countries join the market. This, says Dionisio, justifies paying “a premium valuation multiple” for the stock.
That being said, at a recent share price north of $7.00, Dionisio is of the opinion that Aurora already enjoys this premium valuation. Even if the stock did touch highs north of $16 a share in the past year, there’s no guarantee it will return to that price point any time soon. Indeed, Dionisio values the stock at no more than $8 a share today — and accordingly, does not endorse it as a “buy,” rating the stock only “neutral.”
Is that fair?
As Aurora moves from selling dried marijuana flower into higher margin products such as vapes, beverages, and edibles, Dionisio believes we’ll see both an expansion of marijuana’s popularity (noting that “these advanced delivery forms comprise about 1/3 of total cannabis product sales” in U.S. markets where they’re legal today), and profit margins as well.
That being said, Canada has already pushed back the date at which it will permit sale of these products once, from October to December 2019, and other delays could arise. Furthermore, Dionisio doesn’t see Aurora turning a quarterly profit again (much less an annual profit) before Q4 2020 at the earliest. At the same time, the stock’s share price, combined with Dionisio’s $0.20 per share earnings estimate for 2021, show the stock to be very highly valued at 36 times earnings (that may or may not happen) two years in the future.
That could be a long time to wait in a rapidly changing market, and one in which Aurora Cannabis is far from the only player. To the contrary, Dionisio notes that he’s aware of “approximately 100 companies are on the list of licensed producers of cannabis products in Canada.” In the meantime, Aurora Cannabis is losing money and burning nearly a half billion dollars in cash every year, and valued at 56.5 times revenues.
“With the stock already trading at over a 100% premium to the peer group average on an Enterprise Value/2020 Revenue multiple basis, we believe shares of ACB appear largely fully valued, and we recommend investors await a more attractive entry point before accumulating the stock,” the analyst concluded.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.