Should You Buy the Dip at Aurora Cannabis Inc.?

Aurora Cannabis Inc. (TSX:ACB) show promise in the long term, but the cannabis market is dangerous for investors right now.

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Canadian cannabis stocks have experienced a bout of severe of turbulence since late January. A report from The Globe and Mail released late on April 8 suggested that Toronto-Dominion Bank had taken steps to dissuade clients from venturing into the cannabis sector. TD Wealth Private Investment put a slew of cannabis stocks on its non-approved list of securities, demonstrating the turn of faith for advisors in what has been one of the most explosive sectors since late 2015.

Aurora Cannabis Inc. (TSX:ACB) stock plunged 27.6% month over month as of close on April 6. Shares are now down 15.6% in 2018 after reaching an all-time high of $15.20 in late January. Aurora has been a premier performer in the sector since the late summer of 2017 and made a huge splash with its acquisition of CanniMed Therapeutics Inc. to make it the largest producer in Canada.

Analysts were sounding the alarms over cannabis stock valuations in late 2017. A broader stock market sell-off has proven to be the catalyst in the now volatile sector. There are still options for investors eager to test the cannabis market ahead of recreational legalization.

What about Aurora? Does it make sense for investors to stack this company in their portfolios after the stock has almost halved since the beginning of the year?

Aurora released its fiscal 2018 second-quarter results on February 12. Active registered patients for its medical cannabis rose 12.6% from the first quarter of fiscal 2018 and 78% year over year. Grams sold jumped 30.5% from the first quarter to 1.16 million and surged 115.9% from the prior year.

Revenues increased 41.8% from the first quarter to $11.7 million and were up 201.2% from Q1 fiscal 2017. Cash cost of sales per gram and cash cost to produce per gram also dropped 19.4% and 24.6%, respectively. Dried cannabis sold in Germany rose 101.1% to $2.5 million. As of the end of the second quarter, Aurora boasted a production capacity of 240,000 kilograms per annum, with the acquisition of CanniMed boosting that capacity by 7,000 kg/year.

Its 2017 acquisition of Germany-based Pedanios GmbH provides the company with remarkable potential to break in to lucrative European markets. Pedanios is one of the only organizations in Germany to obtain E.U. GMP certification for the import, release, and distribution of cannabis. This also gives it access to other E.U. markets. Aurora recently won a public tender to supply medical cannabis to the Italian Ministry of Defence, which controls supply to the Italian market.

What will give investors pause, especially in light of current volatility, is Aurora’s current market cap, which exceeds $4 billion. Compare this to quarterly revenues, which just breached the $10 million mark. Earlier this year, I’d warned investors that cannabis companies were entering a “show-me” phase in the market. This could spark even sharper sell-offs when recreational legalization first gets underway, as industry experts are predicting a turbulent roll-out.

Aurora remains an enticing long-term hold considering its capacity and the headway it has made into European markets. However, in the short to medium term, the stock is unlikely to shake off this renewed volatility.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned.

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