Aurora Cannabis Inc. (ACB) stock is apparently a risky investment considering a significant drop in its share price this year. The growth of Canada’s licensed cannabis producer was recently hurt by the negative effects of the pandemic on its retail revenue, as well as its uncertain future in the U.S.
However, Aurora is not the only cannabis stock facing slow growth. Moreover, things could change dramatically for the company if potentially high growth markets like the U.S. and Europe legalize the use of cannabis.
Shares of leading cannabis producers including Aurora have been fluctuating over news related to the legalization of marijuana in the highly lucrative U.S. market. The newly elected U.S. president Joe Biden is expected to make reforms on cannabis use as promised by the Democratic party in pre-election campaigns.
Cannabis use was legal around the world until the start of the 20th century. Many American states banned the use of cannabis in the mid-90s. Other countries followed suit and started outlawing cannabis one after the other.
However, things have changed since then. Many countries have legalized the use of cannabis for medical purposes in recent years. Some of them, including few American states, even authorized its use for recreational purposes.
This turning tide has been creating potential growth opportunities for cannabis stocks. The cannabis market could become one of the rapidly growing industries over the next decade in the U.S. According to an estimate, legalized cannabis sales in the U.S. is expected to increase by three folds to $37 billion by 2024
The reason behind the increasing growth potential of the cannabis market is the sudden shift in the opinion of people related to the use of cannabis. Only a third of Americans favored cannabis use by the mid-2000s, according to a National pollster Gallup. However, the nationwide support for cannabis reached 66 percent on average during the last two years, with more people softening their stand on cannabis.
The legality of cannabis in America varies from state to state. After the recent elections, 15 states have voted in favor of both medical and recreational cannabis. However, the product is not available for sale in all of them. As of now, 10 states have shown a green signal for use of weed including Alaska, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Nevada, Oregon, and Washington.
Nonetheless, that green signal does not mean the product will become instantly available for sale in the aforesaid states. For instance, the state of Maine legalized cannabis for adult-use in November 2016, and it took nearly 3 years to start the sale of recreational pot despite legalization.
Moreover, the states of Arizona, Montana, and New Jersey, among a few others have completely legalized cannabis, but its retail sales have not been started there as of now.
In short, it is very much likely that more American states and countries will authorize the use of medical and recreational marijuana in the future, as increasing number of people come in support of its use. Ultimately, cannabis stocks, including Aurora, are also expected to benefit from the changing scenario.
Cannabis producers have already started planning to jump into the lucrative marijuana market of the U.S., though industry experts believe that they will have to wait for some time. The industry is betting that the newly elected president will be friendly to the market as his party vowed to decriminalize cannabis after taking charge.
Earlier this month, Chief Executive Officer at Aurora Cannabis Miguel Martin said in a statement that with Aurora’s vast experience in Canada and new markets such as Germany and Poland, it is ready to step into the U.S. market.
Martin also said that “we see both in the U.S. and globally and increasing sort of openness towards THC bearing cannabinoids and that bodes well for a company like Aurora.”
Risks associated with Aurora Cannabis stock
Aurora has not started turning a profit, which is a worrisome thing for those looking to invest in the stock. The company has been making efforts to reduce costs by closing its wide network of cultivation centers amid weak demand. Though, its cost-cutting initiatives alone are not enough to turn things around.
Moreover, its stock has also lost significant value in recent months. It also lost its top spot in the consumer user segment in its home country Canada, which is also its biggest market. With a slipping market share at home, it will become difficult for the company to grow in international markets like the U.S., as well as convince investors that it can turn a profit.
However, on the bright side, the company’s aggressive plans to cut costs and focus just on profitable categories have somewhat helped it in the recent quarters. Aurora expects to turn a profit by the second half of 2021. If the company managed to report a profit next year, it will bring new investments and boost the confidence of existing shareholders.
Nevertheless, many industry analysts still consider Aurora a risky investment. However, those risks seem to be dropping as its transformation strategy has started bringing some positive changes.
Q1 financial report
Aurora Cannabis announced its financial results for the first quarter earlier this month. Revenue for the quarter came in at $67.8 million, slightly up from $67.5 million in the prior quarter.
Revenue from the consumer cannabis segment decreased 3 percent on a sequential basis to $34.3 million. Comparatively, revenue from the consumer cannabis extracts segment increased by $3.6 billion on a quarter-over-quarter basis.
On the other hand, revenue from its medical cannabis segment rose 4 percent on a sequential basis to reach $33.5 million. The growth in the segment was mainly attributed to the company’s strong foothold in medical cannabis in the international markets. The company’s adjusted EBITDA loss came in at $57.9 million for the quarter, as Aurora incurred restructuring costs of $47.4 million.
Aurora stock price has fluctuated several times in recent months. Overall, the stock plummeted more than 66 percent on a year-to-date basis.