Shares of Canadian cannabis company Aurora Cannabis (TSX:ACB) are trading 99% below all-time highs, making it among the worst-performing companies on the TSX. Currently valued at a market cap of $250 million, let’s see if it makes sense to invest in Aurora Cannabis stock right now.
Aurora Cannabis stock has poor fundamentals
Canada legalized marijuana for recreational use in October 2018, after which Aurora Cannabis and its peers expanded manufacturing capabilities at a rapid pace. Cannabis producers also acquired competitors at a hefty premium to gain market share in Canada.
However, most Canadian companies overestimated demand resulting in an oversupply of products and lower prices, negatively impacting profit margins. Additionally, cannibalization from the illegal market also hurt sales in the last five years, driving inventory levels of cannabis stocks significantly higher.
These factors resulted in multi-billion-dollar write-downs and widening losses. For instance, between fiscal 2020 and fiscal 2022 (ended in June), Aurora Cannabis reported cumulative operating losses of $950 million.
To support these losses, Aurora Cannabis raised equity capital several times, diluting shareholder wealth in the process. The company also scaled down operations, initiated company-wide layoffs, and shifted focus toward the higher-margin medical marijuana business. But in the last 12 months, its operating losses rose to $256.2 million.
Aurora Cannabis ended the fiscal third quarter (Q3) with a cash balance of $235 million, which suggests it needs to turn profitable on a cash flow basis within the next 12 months.
What’s next for ACB stock price and investors?
In fiscal Q3 of 2023, Aurora Cannabis reported sales of $64 million, an increase of 27% year over year. Aurora Cannabis stated it delivered $400 million in annualized cost savings since February 2020 but still reported a net loss of $87 million, or $0.25 per share, in the March quarter.
Aurora Cannabis also emphasized it reported a positive adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) for the second consecutive quarter. In Q3, its adjusted EBITDA stood at $310,000, but it remains unprofitable on a GAAP (generally accepted accounting principles) basis.
Aurora Cannabis claims it will achieve a positive free cash flow by the end of fiscal 2024. However, the company has historically failed to deliver on its lofty promises.
Analysts now expect sales to fall by 20.6% to $175 million in fiscal 2023. The top line is then forecast to rise by 45.6% to $255 million in fiscal 2024. Its adjusted loss per share is estimated to narrow from $5.16 in 2022 to $0.19 in 2024.
One positive for investors amid this carnage is the company’s leadership position in the medical marijuana segment. It is the number player in this vertical in Canada in terms of revenue. Aurora Cannabis also has a high percentage of insured patients, which should result in stable demand across market cycles.
Another major driver of sales in the upcoming decade will be the legalization of cannabis in several European markets. Aurora Cannabis already has a presence in 11 international cannabis markets that include Germany and France.
The Foolish takeaway
Aurora Cannabis is a fundamentally weak company making it a high-risk investment. There are several other cannabis producers south of the border that report consistent profits, which are much better investments.
For ACB stock to stage a turnaround, the company will have to race toward profitability while sustaining top-line growth. Analysts expect Aurora Cannabis stock to gain by 40% in the next 12 months.
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