Comparing Aurora (ACB) favorably to its also-NYSE-listed rival Canopy Growth (CGC), Jefferies analyst Owen Bennett initiated coverage of Aurora with a “buy” rating and a price target of 12 Canadian dollars (about US$9.11). Like larger Canopy, Bennett sees Aurora as well positioned to dominate the global marijuana market, and eventually to become “a big 3 global player long term.” (To watch Bennett’s track record, click here)
Locally, Aurora boasts a 20% market share in Canadian medical marijuana, strong branding in recreational pot, and production capacity second only to that of Canopy itself. Internationally, the analyst notes that Aurora has filed three medical patents for drugs derived from cannabis, is participating in 40 clinical trials (nearly twice as many as Canopy and Tilray are doing, combined), and is a player in 10 international markets — just two fewer than Canopy, and one behind Tilray.
Continuing its analogies to Canopy, Bennett observes that the two companies have “very similar” prospects for long-term sales of marijuana projects — which is good news, because as of today, neither one of them is selling very much, at least not relative to their respective market capitalizations. Canopy, with a market cap just a smidge over $15 billion, sold $118 million worth of product over the past 12 reported months. That’s a valuation of 128 times sales, not earnings — of which Canopy has none.
Aurora, meanwhile, carries a market cap of less than $7.3 billion (despite running up 5% on Monday) on sales of just over $90 million. Its resulting price-to-sales valuation of more than 80x is therefore cheap-er than what Canopy costs — but it’s still far from cheap. And in case you were wondering, Aurora, like Canopy, earns no profits whatsoever — actually, $54.4 million in trailing losses.
Despite the extreme valuation of Aurora stock, Bennett likes it better than Canopy, hoping that over time Aurora will “accelerate” its Canadian sales (and hopefully, earn some Canadian profits), and given a bit more time, expand its US presence as well.
So what’s not to like about Aurora Cannabis?
Well, if you read between the lines, the fact that Bennett is looking for Aurora to “accelerate” Canadian sales implies that such sales growth isn’t quite as good as the analyst would like to see right now. Similarly, the flip side of the analyst’s repeated mentions of “US optionality” for Aurora is that, right now, the company really isn’t able to do a whole lot of business in the U.S., where marijuana remains illegal under federal law.
Bennett also notes, more than once, that Aurora has been diluting its early shareholders rather heavily through a business strategy of paying with stock for bolt-on mergers and acquisitions of competing pot players. Although the analyst expresses hope that “further M&A dilution will be limited,” there’s no guarantee this will prove correct.
And of course, there’s the valuation. Even if 80 times sales is cheaper than Canopy, it’s still a pretty steep price to pay for what remains a speculative business.
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