First Stage Investor

Why Aurora Cannabis Stock Took a Dive

Why Aurora Cannabis Stock Took a Dive
By Vin Narayanan
Date December 30, 2019

Aurora Cannabis stock got hammered last week. It began trading at $2.15 on the New York Stock Exchange, and as of this writing, it’s trading at $1.92. That’s a drop of more than 10%.

Aurora’s stock price started to fall when Chief Corporate Officer Cam Battley announced he was stepping down the weekend before Christmas. Then last week, Jefferies downgraded Aurora to a “Hold” as its stock price dipped.

And the reality is that things are likely to get worse – especially for Aurora and other Canadian pot companies – before they get better.

Canada has been extraordinarily slow to accept, review and approve marijuana retail licenses. Ontario, the country’s most populous province, currently has fewer than 30 retail locations.

In an effort to open more stores quickly, the province is revamping its licensing process. It will begin accepting applications for retail operator licenses next week and retail store authorizations in March. And beginning in April, Ontario plans on licensing up to 20 stores a month.

For pot companies that were expecting several hundred stores to open up in 2020, this is disastrous news.

Also, Quebec (Canada’s second-most-populous province) has banned most edibles. And Quebec and Newfoundland have banned cannabis vapes.

So whatever revenue boost pot companies were expecting Cannabis 2.0 to provide won’t materialize until at least the middle of next year.

Aurora has also accumulated a lot of goodwill on its balance sheets. Aurora last reported about CA$5.6 billion in assets. And about 57% of that is goodwill.

Now, most of the goodwill comes from aggressively acquiring companies at the top of the markets. These were mostly stock-only deals. And those acquisitions have put it in good shape for the long run. But in the short run, the amount of goodwill on the balance sheet is pretty scary.

The company will probably have to write off some of that goodwill. And that’s going to depress Aurora’s stock some more.

The good news is that Aurora Cannabis – and other Canadian pot stock companies – has done a good job of setting itself up for the long haul. Grand View Research expects the global marijuana markets to be worth $66.3 billion by 2025. Now they just need to survive – and execute – in the short term.

And that’s what investors need to think about. In the near term, Aurora Cannabis and other Canadian pot stocks are likely to struggle. Their prices will likely drop lower than they are right now.

But in the long run, these same companies should be immensely profitable.

So it’s all about time frame. At First Stage Investor, we take the long view. So we’re comfortable staying with Aurora Cannabis and other Canadian pot companies. But the right decision for you all depends on your time frame.

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