Now is the time to short Aurora Cannabis.
“But they just merged with MedReleaf, they’re the biggest cannabis company in the world!”
Most LPs are losing money. Supported by the stock market that’s fuelled by cheap money from the US Federal Reserve, LP valuations aren’t reflective of true underlying values. Whatever profits they do manage are erratic and irregular.
And they know this. Owners and investors in LPs realize the Canadian market is too small and so make promises of foreign markets. But these are pipe dreams until the alarm clock sounds.
And unfortunately for them, when the alarm rings, it won’t be to the tune of opening European markets. It’ll be the economic crash bubbling under the surface.
Hence, why LPs like Aurora keep consolidating. First, CanniMed Therapeutics Inc. for $1.2-billion in January. Now, it’s MedReleaf for $3.2-billion.
None of these mergers are worth the price. When asked what metrics he used to value these mergers, Aurora CEO Terry Booth replied, “Metrics …” then trailed off, before giving his final answer: “That’s our secret.”
Chief commercial officer Cam Battley didn’t have much insight to save Booth. He said, “We don’t have an exact calculation of the synergies.” But assured us everything was hunky-dory.
Instead of relying on the old, tried and tested methods of balance sheets, revenues, assets, equity, net income and profit — Aurora wants you distracted by its large merger with MedReleaf.
Combined, their market value is $7.4-billion. Aurora now has a larger production capacity. But even at 570,000 kilograms of cannabis per year, assuming perfect production, it’s still hard to justify a $7.4-billion valuation.
And that’s billion, with a B, as in “Bubble.”
Canada’s population does not warrant a large number of large producers. And we can’t trade this stuff with the United States, at least not right now, officially.
So Aurora sells the fiction of global markets — particularly in Europe.
But what’s to stop Europe from establishing their own medical cannabis cartel? And why not source from Israel, a country closer geographically and miles ahead of the Canadian competition?
And despite appearances of professionalism, the quality of cannabis produced by Aurora is nothing compared with many of the “BC Bud” products on the market, produced by nonviolent people whose participation in the industry predates Aurora by decades.
Simply, Aurora Cannabis produces crap. Even their books are in the dumps.
Yet, Aurora is trading 28 times higher than it should be considering its earnings before interest, taxes, depreciation, and amortization.
Aurora is paying for MedReleaf with its inflated paper — with its overvalued shares.
And they’re paying a 34 percent premium for MedReleaf. They already paid a heavy premium for CanniMed.
But who really pays for this? Shareholders do. Existing shareholders get diluted.
This isn’t unique to Canada’s LPs. Last year Netflix burned through more than $2 billion of its shareholders’ money producing original content like Stranger Things. Likewise, Uber lost $4.5 billion in 2017.
There is something afoot in financial markets. Now may be the best time to exit.