Cannabis Demand Is at Record Highs: Time to Buy Aurora (TSX:ACB)?

Ironically, the cannabis industry is gaining traction when most other industries are gasping for breath. If the sector is finally moving in the right direction, should you buy in?

| More on:
A stock price graph showing growth over time

Image source: Getty Images.

The pandemic has changed the market in unprecedented ways, and one of them was driving the cannabis demand higher in the country. There was a 19% increase in adult-user Cannabis sales from February 2020 to March 2020 — and the trend is continuing.

Cannabis producers across the country are raking in record sales. The month of June was a hit, and July is expected to be another record-breaking sales month.

Cannabis demand isn’t diminishing, and Canadians aren’t the only ones who are banking on cannabis to make this stressful period more bearable. The sales are increasing all across the globe, and many Cannabis producers are expected significantly better numbers for the next quarter. New York is also considering legalizing cannabis to add to the badly needed tax dollars.

The cannabis industry in Canada  

The cannabis industry in the country became a bust after the initial boom, and even the second phase of legalizing (Cannabis 2.0) couldn’t do much to boost the industry. There were many factors behind the poor performance of most of the players in the sector, but one common denominator has been the black market and its unusually low prices.

The picture changed a bit during the COVID-19 pandemic. Cannabis demand reached yearly high numbers, and the trend has sustained for at least four months now. One producer that had revenues of about $221 million in 2019 expects a four-fold increase this year and generates about $1 billion in revenues.

But it’s not as straight forward. Currently, Canadians’ buying power has been artificially propped up by government stimulus packages, while unemployment is at an all-time high. Sooner or later, the stimulus will run out, and if most Canadians haven’t found a job or started earning another way before that time comes, the discretionary Cannabis spending might take a hit.

Time to buy?

If the industry is rebounding, is it time to buy in? Especially into a stock that’s fallen the hardest in the last couple of years: Aurora Cannabis (TSX:ACB)(NYSE:ACB). Aurora Cannabis started as one of the strongest and largest players in the game, trading well over $150 at one point.

Right now, the stock is trading below one-tenth of that valuation, at $14 per share at writing. After the brief rally in May, before that, the stock was trading in single digits.

The company brutally diluted its stock value in order to fund its aggressive acquisition strategy and to increase the size of its global footprint. But the same period that boosted cannabis sales in Canada didn’t serve Aurora well in Europe, where sales actually dropped.

This has caused Aurora to close up offices in Italy, Portugal, and Spain, and consolidate its European presence to its Denmark facility.

While the Cannabis industry seems well poised for growth, at least for now, Aurora might not be the best horse to back in this race.

Foolish takeaway

Lack of stimulus isn’t the only dark cloud on the horizon of the cannabis industry. The lockdowns and social distancing measures might’ve curtailed the illegal cannabis industry a bit, driving consumers toward legal vendors. But once the country fully reopens again, the situation might revert to where most buyers preferred cheaper illegal cannabis over costly legal vendors.

Even if it doesn’t, and the cannabis industry is finally on the right track, Aurora remains a risky bet. The current rally is already weakening. The stock is already 40% down from its recent high in May. Other stocks in the sector have been more successful in riding this current wave and keeping valuations high.

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 Adam Othman has no position in any of the stocks mentioned.

More on Investing

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »