In recent weeks, Aurora Cannabis ( NYSE: ACB) stock has seen new life. It all began with the business launching its third-quarter 2020 results on May 14, which revealed 18%revenue development from the prior period. A dedication to more improving its costs likewise provided financiers a factor to be hopeful that success may not be simply a pipe dream.
Then, on May 20, the marijuana producer also announced it was acquiring Reliva, a cannabidiol (CBD) brand name that would allow it to penetrate the U.S. market. As amazing an opportunity as that might seem initially look, here’s why investors shouldn’t put excessive stock in it.
It’s entering an already crowded hemp market
Many headlines advertise Aurora’s recent acquisition as the company getting into the U.S. CBD market. All types of CBD aren’t legal in the U.S. (federally), and Aurora can’t provide non-hemp items that include more than 0.3%of tetrahydrocannabinol (THC).
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The excellent news is that according to research companies BDS Analytics and Arcview Market Research, the overall CBD market in the U.S. is still expected to reach $20 billion by 2024, up from simply $1.9 billion in2018 And the bad news is that the rosy outlook for CBD does not suggest the opportunity is going to equate into considerable growth for Aurora.
That’s since Aurora will not just be competing with other U.S. companies for market share, but with Canadian pot stocks that are also looking to benefit from the opportunities in the hemp market. The business’s essential rival, Canopy Development ( NYSE: CGC) is already in the CBD hemp market in the U.S., and one of the relocations it’s making to cut expenses is to really stop farming for hemp at its Springfield, New York location. The pot giant stated it had “an abundance of hemp produced in the 2019 growing season” that it was going to offer initially prior to making more. It’s not just Canopy Development that has an excess of supply, either; it’s a problem for the whole industry.
Julie Lerner, who is CEO of the PanXchange where hemp is traded, confirmed in January that there was much more supply than demand for hemp. That’s not going to bode well for a business like Aurora, which is trying to enhance on its margins and get closer to profitability.
Having access to thousands of places doesn’t guarantee growth
In the news release revealing the acquisition of Reliva, there wasn’t a whole lot of information on how huge of a gamer the business is in the hemp market. Aurora referred to Reliva as “a leader in the sale of hemp-derived CBD items in the United States,” there wasn’t anything to quantify or justify that other than to say that its items were sold in more than 20,000 U.S. areas.
Hemp-derived CBD business Charlotte’s Web ( OTC: CWBHF), offers its products in fewer areas, and it has far stronger sales. In the company’s first-quarter results, launched on May 14, Charlotte’s Web revealed that its reach exceeded 11,000 areas which its sales for the three-month period totaled $215 million. And although it’s seen an increase in the number of shops carrying its products, that hasn’t equated into substantial growth.
A year back, the company tape-recorded sales of $217 million when its products were in more than 6,000 locations. The increase in locations over the previous year hasn’t resulted in a surge in sales for Charlotte’s Web, and Aurora investors shouldn’t make the error of presuming more areas indicate greater earnings.
The move doesn’t make Aurora a much better buy
Aurora expects Reliva to assist the Alberta-based pot manufacturer inch closer to achieving a favorable adjusted earnings before income, taxes, depreciation, and amortization (EBITDA) figure. With Aurora sustaining an adjusted EBITDA loss of 50.9 million Canadian dollars in Q3, it has a long method to go to reach breakeven, with or without Reliva. The acquisition may help play a small part in improving Aurora’s bottom line, but the company still has a lot of work to do in enhancing its financials.
The only certainty, it appears, is that the deal will lead to more dilution for shareholders. The business expect the offer will close in June, and it will cost Aurora as much as $45 million in shares.
The acquisition is a modest one for Aurora that will help contribute to its top line, however that’s about it; Aurora remains a dangerous buy, and one quarter and one acquisition isn’t going to change that. The pot stock is still down more than 80%over the past 12 months, notably even worse than the Horizons Cannabis Life Sciences ETF ( OTC: HMLSF), which has actually fallen by 60%.