Few industries are hotter than marijuana right now. In the United States, 36 states have given medical cannabis the green light, 15 of which also allow adult use. Meanwhile, Canada opened the door to recreational pots sales in October 2018. These two markets, plus Mexico, could generate around $ 75 billion in annual weed sales by 2030.
As investors, however, we also know that not every company can be a winner. Sometimes the companies that seem to have the clearest advantages in investing in the next big things are the ones that are falling the hardest.
Aurora Cannabis has been the most lauded pot broth for years
Two years ago, no marijuana supply was hotter than Aurora cannabis (NYSE: ACB). By mid-2019, Aurora had amassed 15 grow facilities worldwide and was well on its way to becoming the leading cannabis producer. Assuming that all facilities are fully utilized, the company could have delivered more than 650,000 kilos per year. Because Aurora had a number of large-scale plants, it was expected to be among the most cost-effective weeds in the entire industry.
Aurora Cannabis also had many global connections and was present in 24 markets outside of Canada. No pot inventory had a greater reach beyond the national borders. These overseas markets have been viewed by the investment community as a setback to oversupply in Canada and a means for Aurora Cannabis to maintain its operating margins.
The icing on the cake is that Aurora hired billionaire Nelson Peltz as a strategic advisor in March 2019. Peltz’s activist background was mainly in the food and beverage industry. With higher-margin derivatives hitting the market in mid-December 2019 and Aurora, the last big-name Canadian top loss with no stock investor, it seemed clear that Peltz would help make the company a consumer products partner.
Less than two years later, none of this came to fruition.
In other words, Aurora failed
Without talking around the cannabis bush, Aurora couldn’t deliver.
Part of the blame for its failure rests with federal and provincial regulators in Canada. The federal supervisory authorities approved the cultivation and sales licenses before October 17, 2018, the start date for the leisure pot, only slowly and delayed the possible introduction of higher-margin derivatives (food, vapes, infused beverages, concentrates and topical products). by two months.
In the meantime, some provinces are having major problems solving supply bottlenecks. Ontario, Canada’s most populous province, relied on an ineffective lottery system to license pharmacies until late 2019. Although a more traditional process of reviewing applications is being implemented, Ontario is still trying to catch up.
This oversupply has also completely destroyed dried cannabis flower borders. With marijuana abundant and the black market still a major threat to licensed producers, growers like Aurora had no choice but to focus on high quality pot products. Trying to compete with illegal producers has not worked well for Aurora Cannabis.
But the company and its management team (mainly the former management team) are also to blame.
For example, Aurora Cannabis grossly overestimated the capacity needed and the company grossly overpaid for the assets it acquired. Canada should only be asking for near 800,000 kilos of weed a year, but Aurora had a portfolio capable of producing more than 80% of that amount.
Then there were the acquisitions. Aurora’s Canadian all-stock deal for $ 2.64 billion to buy MedReleaf is arguably the worst pot-stock buyout in history. After the closure of MedReleaf’s smallest grow facility and the sale of the largest greenhouse that was never retrofitted to produce cannabis, the net cost to Aurora was CA $ 2.63 billion for 28,000 kg annual production and a handful of private labels. This resulted in Aurora Cannabis taking some heavy write-downs in the 2020 calendar year.
The 12,200% gain that nobody saw coming
However, many investors didn’t see the biggest risk of all: Aurora’s penchant for funding everything with its common stock. Management always relied on selling stocks or using stocks as collateral, whether it was the day-to-day running of the company or more than a dozen acquisitions.
Taking into account the 1:12 reverse split the company enacted in May 2020 in order not to be delisted from the New York Stock Exchange, the company had around 1.35 million shares outstanding in June 2014. Then rampant spending began. The craziest part is that the dilution that Aurora investors are struggling with hasn’t slowed down a bit, despite the shake up Canada’s pot industry.
On November 11, Aurora announced a $ 150 million public offering of 20 million shares at a price of $ 7.50. Two months later, on January 21, 2021, Aurora announced a purchase financing of $ 125 million at $ 10.45 per share. Aside from the fact that both deals come with warrants that, if executed, would add even more shares to the company’s stock, Aurora now appears to have more than 165 million shares outstanding. In 6.5 years we are talking about a 12,200% increase in the number of shares outstanding in the company.
Let’s put this in an even more understandable context. Over the past four years (as of Jan. 22), Aurora’s market cap has increased 258%. This is no surprise given the number of companies Aurora acquired between early 2017 and mid-2019. In terms of price performance, however, Aurora stock is down 54%. That 308 percentage point difference between Aurora’s increased market cap and the decline in its stocks is directly related to incessant dilution-based dilution.
Although the new management team has been aggressive with its cost-cutting tactics and defied the urge to make additional acquisitions, Aurora Cannabis will never be a worthwhile investment as long as the company continues to fund its operations entirely through the sale of its own shares.