The North American cannabis market is expected to see $75 billion in annual cannabis sales by the year 2030, making it one of the fastest-growing segments in the continent.
The sale of legal weed in the US and Canada has been exponentially increasing over the past decade. Canada legalized the sale of recreational marijuana in 2018, while approximately 36 states in the United States are allowing the sale of medical marijuana.
Hence, the overall cannabis market is currently ripe for investors. Thanks to the fast-paced growth of the industry investors can quickly see their money multiply.
However, not every cannabis stock is destined to be a winner. There are certain stocks that should be avoided like the plague mainly due to bad management and unfruitful business decisions. Aurora Cannabis is one of them.
Aurora Cannabis is popular among Robinhood investors
Aurora Cannabis used to be one of the most popular stocks on the investing platform Robinhood. In 2019, the company had more than 15 production facilities with a worldwide presence in over 24 countries.
The pot heavyweight was well on its way to becoming the biggest producer of cannabis in the world. Additionally, due to economies of scale, Aurora was also on track to produce the most cost-efficient cannabis products.
Aurora was expected to touch production levels of 600,000 kgs on an annual basis. The company also had a market capitalization of $10 billion at one time.
Uncontrolled stock dilution
Most investors failed to spot that the company had a penchant for financing most activities through its common stock. Whether it was acquisitions or day-to-day operations, the company kept selling more and more stock to finance its operations as well as inorganic growth.
In 2014, the company had around 1.35 million shares outstanding. In November 2020, the company announced a further public offering of 20 million shares. In January 2021, the company entered into bought-deal financing of $125 million. Effectively, over a period of around 7 years, the company’s outstanding stock went from 1.35 million to 198 million.
This is an increase in the outstanding share count of approximately 12000%.
Aurora Cannabis has massively burnt investor wealth
Over the past two years, the company’s share price is down around 89.7%. A majority of this decline can be attributed to shareholder dilution and Aurora’s staggering losses. The company’s operating losses widened from $80 million in fiscal 2018 to $486 million in 2020.
Furthermore, the company grossly overestimated the amount of production it would need to meet the demand for cannabis-based products. In Canada alone, the company had enough production capacity to meet 80% of the demand of the entire country. Additionally, this unnecessary capacity was acquired at a very high cost.
ACB stock remains a high-risk bet
Now, the company is almost completely under new management that has been laser-focused on cutting costs and avoiding further acquisitions, however, its problems might be far from over.
Aurora Cannabis is expected to post a net loss of $2.77 per share in fiscal 2021 and $0.76 per share in 2022. Given the company’s cash balance of $477 million, it might have to raise additional capital in the near future.