It’s not easy to claim that a stock is worth nothing. Even failing companies have some tangible value trapped in their plants, equipment, and properties. In other words, most businesses have at least some scrap value.
In the legal marijuana sector, stocks seemed to have fallen well below this scrap value. One of the top players, Hexo, for example, is currently trading at less than book value per share. Aphria stock has fallen below book value too. Both are trading at roughly 95% of tangible book at the moment.
However, that’s nothing compared to the discount Aurora Cannabis (TSX:ACB)(NYSE:ACB) stock seems to be offering. At the time of writing, Aurora stock is trading at just 71% of book value. In other words, the company is worth more dead than alive. Does this make it a great buying opportunity? Not exactly.
Discounted valuations are a message
In my experience, most stock investors are pretty savvy. The average investor tends to understand traditional metrics like cash flow, book value, and tangible assets. So, the fact that a stock, particularly a well-known cannabis stock, is trading at less than its accounting value is a message. The market thinks Aurora will destroy value.
Think of it this way: if I sold you a box filled with $1,000 for $700, you’d think that was a pretty good deal. However, what if I owe that $1,000 to someone else and the loan passes to you when you buy the box? Now the deal is a lot more complicated and a lot less attractive.
That’s precisely what seems to be happening with Aurora stock. The company currently has only $191 million in cash on its books and is losing $218 million in cash annually. Meanwhile, the company holds $795 million in debt.
That’s a bad situation, but investors were hoping that a rapid acceleration in legal weed sales and the launch of Cannabis 2.0 products will eventually make the company profitable and help it turn things around. Now, this turnaround seems less likely.
The Aurora team has had several missteps over the past few months. Germany suspended sales of the company’s medical cannabis products and imposed a hefty fine. Last month, Italy canceled one of the company’s lots of medical cannabis, because it failed to comply with European Union Good Manufacturing Practices (E.U. GMP) standards.
Meanwhile, legal pot sales in Canada have been disappointingly low, and the roll-out of edibles has taken longer than expected. If these problems continue, Aurora’s balance sheet could get squeezed further.
Its chances of survival would have been higher if it were backed by a larger, better-established company, like Canopy Growth is with Constellation Brands. However, Aurora doesn’t seem anywhere close to striking such a deal in 2020.
Gordon Johnson of GLJ Research argues that if nothing changes soon, the company’s creditors could push it to bankruptcy, effectively pushing the stock price to $0. Unsurprisingly, the research firm has a “sell” rating on the stock.
Bottom line
Considering its debt burden and lack of strategic partners, Aurora Cannabis stock seems like more trouble than it is worth. In fact, if the situation deteriorates further the stock could be worth $0. There are better opportunities for investors in the weed sector.
