The Most Likely Scenario for Aurora Cannabis Stock Doesn’t Look Good

Aurora Cannabis (ACB -3.56%) has been struggling for years. Despite all the layoffs and cost-cutting efforts management deployed, its financials remain problematic and investors simply don’t see many reasons to invest in the business. The stock is trading down to well under $1 per share, and another reverse stock split is inevitable for the company. The likely long-term scenario is that the company isn’t able to survive — at least, not on its own.

Aurora Cannabis investors shouldn’t expect a turnaround

Aurora Cannabis’ stock price fell 96% over the past three years. After some strong initial growth in 2018, when Canada legalized the recreational pot market, an influx of competition made it difficult for the company to stay out of the red, and even simply generating consistent growth is now a challenge.

ACB Revenue (Quarterly YoY Growth) Chart

ACB Revenue (Quarterly YoY Growth) data by YCharts

The cannabis company pivoted more toward medical marijuana in an effort to improve profitability. However, even that wasn’t enough to turn things around as the company continues to incur net losses. At this point, Aurora Cannabis is likely in too deep to turn things around all on its own.

It lacks the deep pockets that a business such as Canopy Growth has thanks to its partnership with beer maker Constellation Brands to simply allow it to weather the storm and invest in growth opportunities in other markets. As of Feb. 8, Aurora reported 310 million Canadian dollars in cash on hand. That might be sufficient to keep the lights on, but it won’t leave much room for growth given the company’s persistent cash burn.

ACB Cash from Operations (TTM) Chart

ACB Cash from Operations (TTM) data by YCharts

A takeover may be inevitable

At a market cap of around $230 million, Aurora could make for an attractive takeover target. Admittedly, whoever takes over the business will have a big cleanup job to do to trim the operations. But with marijuana companies such as SNDL and Tilray Brands looking at acquisitions to bolster their portfolios, Aurora could make for a suitable target.

What the company has going for it is a strong medical business. Aurora is a market leader in the Canadian medical marijuana market. It’s also in 11 international cannabis markets, including Germany, France, and the U.K. Having a strong global presence in marijuana could be more valuable in the future, especially since legalization in the U.S. doesn’t appear to be inevitable. Companies could opt to go overseas rather than wait for the U.S. market to open up.

Whether it’s SNDL, Tilray, or another marijuana business focused on pursuing growth opportunities, Aurora does have assets that could prove to be valuable to a potential acquirer.

Is Aurora Cannabis stock worth buying right now?

If a takeover takes place, Aurora Cannabis’ stock could rise in value. But that is relative, and even if a deal does happen, it could be after the stock declines even further from where it is now. It can be extremely risky to buy a troubled stock such as Aurora simply in the hopes that another company might buy it out. There’s no guarantee as to when that might happen and what value it would fetch, regardless of how probable the scenario looks to be.

Aurora Cannabis has been one of the worst investments to own in the cannabis industry and there’s no reason to expect that will change now. Inflation hasn’t gone away and consumers are being more selective in what they are spending money on, and that could mean that falling sales remain a problem for the business as the year goes on. Aurora Cannabis is a stock that investors should continue to stay far away from.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Brands. The Motley Fool recommends SNDL. The Motley Fool has a disclosure policy.

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