In 2018, I suggested shorting Aurora. Bad advice, many thought, on the eve of legalization when licensed producer stocks rose.
But the foundation of Canada’s LP system is flawed. In 2022, this is apparent. You made money if you shorted Aurora before the cannabis bubble popped.
The question is now: is Aurora now worth buying on the dip?
Shorting Aurora Again
Aurora Cannabis is one of the worst-performing stocks out there. When I suggested shorting Aurora the first time, the company had announced the acquisition of MedReleaf for over $2.5 billion. Today, Aurora’s total market cap isn’t even worth that much. Back then, their value was $7.4-billion. Aurora’s market cap in 2022 is $400 million.
Far from being Canada’s number one supplier of cannabis, they are Canada’s biggest LP loser. From billions to millions, Aurora has lost well over 95% of its value since 2018, when I first suggest investors short the stock.
(Shorting stock involves selling batches of stock to make a profit, then repurchasing it cheaply when the price goes down.)
Will Aurora crash even further, or is it time to buy cheap in hopes of a bull market in Canadian cannabis?
European Connections & Homegrown Losses
Canada’s small population and relatively small cannabis market do not justify a large number of large producers. So, like in 2018, Aurora sells investors on the potential in Europe. Aurora is one of the few Canadian companies with a licence to grow in Germany. And with Germany likely to legalize it by the end of the year, this could certainly boost the value of Aurora’s shares.
Regardless of when or how Germany legalizes, Aurora still has problems at home. Its infamous “Sky” facility in Alberta closed its doors despite being hyped as a pioneer in cannabis cultivation just a few years ago.
Aurora also announced net losses of $1 billion in its third quarter. The company’s third-quarter financial and operational results saw a 17% sequential decrease in revenue to $50.4 million.
“If you take a look at the top players in Canada, take a look at where their stock prices are compared to where their all-time highs were, and we’re taking a look at losses 99 cents on the dollar,” says Nawan Butt, Portfolio Manager at Purpose Investments. “It’s all to the determent of the equity holder for the LPs. And I’m surprised more equity holders aren’t appalled at some of the decisions management have taken.”
Of course, equity holders probably are appalled at Aurora, hence why the company is laying off 12% of its workforce on a plan to cut $90 million in costs.
Shorting Aurora Based on Negative Cashflows
The problem for Aurora Cannabis and many other large LPs is that they’ve never had positive cash flow. Governments and media like to promote Environmental, Social, Governance (ESG) ratings to determine whether a company is “really” profitable. But this obvious woke progressive nonsense.
All that matters is positive cash flow, which is a problem for Aurora. From last July to March this year, Aurora used $83 million to fund its day-to-day operations. This past June, Aurora raised $172.5 million through offering stock. Investors have every reason to be worried about dilution.
Is it time to short Aurora again? In 2018, Aurora was trading 28 times higher than it should be, considering its earnings before interest, taxes, depreciation, and amortization. Today, Aurora is trading 1.7 times the revenue it earns from selling cannabis.
Canopy is in a worse position, with investors paying 3.6 times revenue.
German legalization may boost their stock performance as Canadian legalization did. But that boost was short-lived because the company’s fundamentals are too risky.
The fundamentals of Canada’s legalization scheme are unsound. Throw an economic depression into the mix (the consequence of excessively low-interest rates, not the “psychology” of the masses), and it’s a perfect storm.