Why Aurora Cannabis Stock Dropped 10%Today

What occurred

Canadian marijuana kingpin Aurora Cannabis ( NYSE: ACB) closed its acquisition of Massachusetts-based cannabidiol (CBD) maker Reliva LLC last night in a $40 million offer(or more than twice that, if Reliva strikes specific monetary turning points over the next number of years).

That seems like excellent news, but financiers don’t appear convinced that it is excellent news. Aurora Cannabis stock plunged more than 10%as soon as trading resumed this morning and hasn’t gotten back much considering that– down 8.5%as of 12: 15 p.m. EDT.

So what

Aurora interim CEO Michael Vocalist says the merger will “produce a market leading international cannabinoid platform that we believe can deliver robust revenue and lucrative development.” Investors, however, seem more worried about the cost Aurora spent for that development.

At $40 million, the purchase cost has to do with three times Reliva’s $135 million in approximated annual sales– which would be a bargain. (Aurora’s own shares bring 6.6 times trailing sales.) If Aurora winds up paying the extra $45 million it has accepted, for striking “turning points,” however, the purchase rate will be something closer to 6 times sales– still a bargain relative to Aurora’s own stock assessment, however much slimmer.

Now what

Also of issue: Forty million now and maybe $45 million later will take a huge portion out of the $175 million in money on hand that Aurora had at last report. Meanwhile, the business is carrying $430 million worth of financial obligation (according to information from S&P Global Market Intelligence) and burning money at the rate of some $550 million annually (over the last 12 months).

So, was it a great idea to spend almost half Aurora Marijuana’s cash reserves to obtain a brand-new revenue stream simply 6%as big as the incomes that Aurora Marijuana was currently making? For today a minimum of, investors think not.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.”> disclosure policy”> .