Aurora Cannabis (TSX:ACB)(NYSE:ACB) has had a terrible run in 2019. Down 29% for the year, it has declined more than the Horizons Medical Marijuana Life Science ETF, which tracks the marijuana industry as a whole.
Investors who bought ACB at the start of the year are probably not happy right now. However, with the stock cheaper than it has been in recent memory, it could be set for a comeback. This is a company that has grown revenue by 333% CAGR over the past three years and seems to post huge sales increases every quarter. If it keeps up the growth and moves toward profitability, it could become a millionaire maker. But will it? First, let’s look at those growth figures.
Aurora’s revenue has been growing by leaps and bounds recently — year over year and, to a lesser extent, sequentially. In the fourth quarter, revenue was up 58% from the prior quarter and 416% from a year before. For the full year, revenue was up 349%.
These are impressive figures, to say the least. Not only were the basic revenue figures good, but consumer cannabis specifically grew by 52%, suggesting that legalization is treating Aurora well. Most likely, year-over-year revenue growth will slow when legalization fades further into the rear-view mirror. However, even sequential growth is looking pretty solid for this company.
When it comes to profits, Aurora’s situation is more mixed.
Its most recent quarter was a net loser, with a loss of $11.7 million. However, that was down 68% from the prior quarter. Zooming out to the full year, the loss from operations ($314) was up but lower as a percentage of revenue. Net income for the full 2019 fiscal year was down significantly, with a $297 million loss compared to a $69 million profit in 2018.
One bright point for Aurora is that after a year of its stock tanking and revenue growing, it has gotten cheaper. As of this writing, its price-to-sales ratio was 19 — which is high overall but low for a cannabis stock.
Additionally, the stock has a very low price-to-book ratio of 1.13. This would tend to argue that the company is cheap relative to its shareholder equity; however, there’s a caveat here. Aurora has about $5 billion in assets, of which $3 billion (60%) is goodwill. Goodwill is the premium paid for an acquisition, which can be listed as an asset if the acquired company is generating value. If it’s not, however, then the goodwill will have to be written down. This will lead to a reduction in book value.
Unfortunately, it’s quite possible that some of Aurora’s goodwill will have to be written down. Marijuana companies were scrambling for market share in the months prior to legalization, and many spent money on acquisitions that didn’t generate revenue. Aphria has already taken $50 million in impairment charges, and may be facing more. Aurora has the most goodwill out of all of these companies, leaving it in a vulnerable position.
In the past, ACB had many of the markings of a millionaire-maker stock. Today, that’s less the case. Although the stock keeps getting cheaper relative to sales, we’re not really seeing a clear trend of profitability. The most recent quarterly loss was down, but for the most recent fiscal year, the loss got larger. It’s really hard to establish a trend here. Additionally, this company’s mountain of goodwill could be a problem down the line. Overall, I’d pass on this stock.
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 Andrew Button has no position in any of the stocks mentioned.