Cannabis companies are set to do very well in the coming decade. By 2030, according to economists, the cannabis market could be worth about $170 billion! That’s well up from the about $10 billion it’s worth today.
In the meantime, legalization continues to creep in around the world. Most recently, five states either legalized or decriminalized cannabis in the United States election. With President-Elect Joe Biden set to take office, many cannabis companies believe this is only the beginning. This comes from the former vice-president and Vice-President-Elect Kamala Harris stating the administration would decriminalize marijuana across the country.
So, clearly, many investors are thinking it could be a rebirth for cannabis stocks. Such is the case for Aurora Cannabis (TSX:ACB)(NYSE:ACB), with shares jumping an incredible 200% after the news broke. But should investors hold out hope for this company? Or is it too good to be true?
Investors looking to get rich quick swarmed Aurora thanks to one thing: production. The company was able to boast the highest production at the lowest cost, bringing down cost per gram down to under a dollar. That was unheard of in this industry. With its 15 cultivation sites, the company could produce about 650,000 kilograms per year! And that looked to only get higher.
The company could also boast the highest number of countries it was licensed in. Thanks to its medical marijuana sales, Aurora has a foothold in 24 countries, including Canada. This leaves the door open for when legalization happens in these countries. This includes the United States, where it is still working on its cannabidiol (CBD) market.
Then, of course, there is the room for a partner. The company hired analyst Nelson Peltz to help bring the company to the next level. Peltz has helped with packaging and making recreational marijuana use more appealing in general. While the company remains against the idea of a partnership, success in this area could lead to a partial stake in Aurora that brings in huge cash.
With the pandemic, however, things changed. In fact, it changed almost as soon as legalization hit. Aurora Cannabis stock plummeted after legalization and has yet to recover. The pandemic made that worse, as the company had to shut five of its production facilities, sold a greenhouse, and put a pause on construction of new houses. Now production will be at about a third of the previous 650,000 kilograms.
While medical marijuana sales continue to rise, the company continues to struggle with recreational use. In fact, the bad news only continued as Peltz then resigned with no new deals being brokered. And, of course, let’s not forget the share split to keep Aurora alive on the New York Stock Exchange. It also continues to dilute shares, which shareholders are super upset about. Another reason to be upset? While all this is going on, management received hefty pay raises. Ouch.
Aurora is a shadow of the company it once was. With no big-name advisors, little cash, except what it takes from shareholders, production cuts, and no partnership in sight, I’d suspect these gains are going to be short-lived. If you managed to make money after the recent increase, I personally would advise doing some research and selling at least part of your stake.
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Fool contributor Amy Legate-Wolfe owns shares of Aurora Cannabis.