Given all the hype around Canadian cannabis stocks up on Wall Street these past few months, you may be surprised to learn that there are any analysts left who aren’t obsessed with marijuana stocks. There are — but they’re fewer and fewer in number with each passing day. Case in point: you can subtract one more from their ranks, as Stifel analyst Andrew Carter leaps into the fray with an “initiation” of Aurora Cannabis (ACB) stock.
Admittedly, Carter kind of had to be dragged into this market. His initiation Wednesday was prefaced with grumbles about how he wants to see more “global medical-use opportunities outside of Germany and Canada” to support “consensus revenue estimates,” how he still fails to see any “meaningful avenues for attacking the U.S.” market, and how, all things considered, the analyst still has a “more bearish outlook” for Aurora and its peers, than do many of the other analysts who’ve thrown caution (and valuation) to the wind in rushing to endorse cannabis stocks.
And when all’s said and done, Carter still can’t bring himself to recommend actually buying Aurora Cannabis stock. The analyst rates the stock a “hold,” and assign a C$10 price target, which implies a slight decline in share price from the C$10.37 a share that Aurora closed at on Wednesday.
So why bother initiating coverage at all?
Well, peer pressure for one. When everybody else around you is rushing off to see a show, there’s a natural inclination to at least take a look over and wonder what all the commotion is about. But also, the numbers being throw around concerning the international pot market do naturally attract attention.
In Aurora Cannabis’s case, for example, Carter says he sees a path to sales growing from C$168 million (over the past 12 months) to as much as C$960 million by the end of fiscal 2021. And as the analyst points out, Aurora’s fiscal 2021 wraps up just two years from now.
Six times sales growth in just two years? Yeah, that might prompt someone to at least “initiate coverage.”
Moreover, Carter believes that Aurora, which has posted a 122% negative EBITDA margin over the past 12 months, could return positive EBITDA margins of as much as 28% just two years from now, putting it not just into the “#2 position” position among Canadian cannabis companies — but a profitable No. 2 to boot. According to Carter’s estimates, C$960 million in FY2021 revenues could translate into C$0.11 per share in profit ($0.08 US).
Of course, that would still value the stock at 91 times earnings-two-years out — and maybe even more. As the analyst warns, Aurora is likely to need to “return to the capital markets” from time to time to raise the money it will need to grow its production. But the fickle nature of pot investors means that, if sentiment should ever sour on the marijuana market, Aurora might have to issue a lot more shares than it might like, to raise the money that it needs. And that could dilute shareholders to such an extent that even $0.08 per share could be a stretch by the time 2021 rolls around.
Last but not least, the analyst points out that the lack of partnership with a global consumer or pharmaceutical company has put Aurora at a competitive disadvantage, compared to Canopy Growth (CGC) and Cronos Group (CRON). The analyst noted, “In March, Aurora appointed well-known investor, Nelson Peltz, as a strategic advisor to “explore global expansion and partnership opportunities”. Mr. Peltz has a significant financial incentive to aid Aurora in its partnership pursuits. We do not take his presence here lightly and see this as the chief risk to a more cautious near-term view of the shares.”
Given the risks, Carter sees “hold” may be the best rating Aurora Cannabis stock could have hoped for.
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.