Aurora Cannabis (NYSE:ACB) is a cannabis producer headquartered in Edmonton, Canada. With sales and operations in more than 20 countries, Aurora is one of the most notable cannabis companies in the sector — however, the company has struggled to become profitable since its 2018 initial public offering (IPO).
Let’s see how much a $500 investment into Aurora Cannabis would be worth today if an investor had purchased the stock at its IPO price.
Not every IPO is a good investment
Shares of Aurora opened at $9.70 per share on the New York Stock Exchange (NYSE) Oct. 23, 2018. Technically, this was not Aurora’s first day as a public company, as the company had been trading on the Toronto Stock Exchange since July 24, 2017. It also wasn’t issuing new shares, but only making existing shares available on the NYSE.
Aurora’s debut on the NYSE made Aurora the fourth marijuana-based company to go public in the U.S. Investing $500 into Aurora at the opening price of $9.70 per share would have yielded 51 shares. As shares of Aurora are currently trading at $1.89 per share, an investor would have lost $403.61 in value, an 81% loss. After subtracting the loss, an investor would currently be holding $96.39 in value.
Over-expansion at a premium is destabilizing shareholder value
Aurora has made 15 acquisitions since June 2016, rapidly expanding the company with inflated purchases. Acquiring companies at a high valuation with at Aurora’s pace puts a strain on the company’s balance sheet — specifically, an item known as „goodwill”. When a company purchases another company, the intangible value of the acquired company, or the amount over the fair value in accounting terms, is chalked up as goodwill on the balance sheet.
To prevent companies from sitting on a hefty goodwill balance, the International Accounting Standards Board and the Financial Accounting Standards Board mandate that companies evaluate goodwill for impairment annually. As a company compares the fair value of a subsidiary or reporting unit to the carrying value, the company must write down any losses on the economic unit.
This process becomes precarious in Aurora’s case because the company is sitting on a goodwill balance of 3.17 billion Canadian dollars, CA$1 billion higher than the company’s total market capitalization and 57% of Aurora’s total assets. A writedown of even CA$1 billion could cut the company’s total market capitalization in half, potentially setting the company up for financial disaster.
Where Aurora is headed
In 2019, several class action lawsuits were filed against Aurora by its shareholders, blaming the company for failing to complete planned capital investments and missed revenue and profit forecasts. Additionally, the company halted construction of its two largest projects, Aurora Sun in Alberta and Aurora Nordic 2 in Denmark, to conserve capital. Aurora announced that one of the company’s largest greenhouses in Ontario is also for sale for $17 million in an attempt to preserve capital and lower expenses.
Aurora’s total debt increased CA$375.3 million year-over-year to CA$600.6 million per the recent first-quarter earnings release. As Aurora is continually unprofitable, the interest expense is climbing alongside debt, rising from CA$6.6 million to CA$13.5 million year over year — a 104.5% increase.
A bleak future for shareholders
Aurora’s decisions to overpay for acquisitions by chasing inorganic growth have put the company in a high-risk scenario that will continue to dampen its share price. As the company sits on a weighty goodwill balance, low cash reserves, and an increasing debt obligation, Aurora will need to focus heavily on capital efficiency, decreasing expenses, and maximizing revenue growth.
Shares of Aurora purchased during its IPO on the NYSE have left shareholders with disappointing returns, and may continue to underwhelm shareholders in the near-term unless management can turn the company around. Shareholders sitting on an 81% loss will want to hold on at this point, though, as 2020 will define the survivability of Aurora Cannabis.