Investors are more bullish than they should be. In recent weeks, Aurora Cannabis (NYSE:ACB) stock has seen new life. It all started with the company releasing its third-quarter 2020 results on May 14, which showed 18% revenue growth from the prior period. A commitment to further improving its costs also gave investors a reason to…
In current weeks, Aurora Cannabis ( NYSE: ACB) stock has seen new life. It all started with the business launching its third-quarter 2020 results on May 14, which showed 18%profits growth from the prior period. A commitment to further improving its expenses likewise offered financiers a factor to be enthusiastic that success may not be simply a pipe dream.
Then, on May 20, the marijuana producer likewise announced it was obtaining Reliva, a cannabidiol (CBD) brand that would allow it to penetrate the U.S. market. As interesting a chance as that may seem at first look, here’s why financiers shouldn’t put too much stock in it.
It’s entering an already crowded hemp market
Lots of headlines promote Aurora’s recent acquisition as the company getting into the U.S. CBD market. While it’s technically true, it is worthy of an asterisk at the very least. All kinds of CBD aren’t legal in the U.S. (federally), and Aurora can’t offer non-hemp products which contain more than 0.3%of tetrahydrocannabinol (THC). Nevertheless, U.S. cannabis business that don’t operate nationally and instead run within states that allow medical or leisure pot aren’t limited to those constraints. And till the U.S. government legalizes medical or leisure cannabis, it’s a constraint Canadian cannabis companies will face.
Image source: Getty Images.
The good news is that according to research study companies BDS Analytics and Arcview Marketing Research, the total CBD market in the U.S. is still anticipated to reach $20 billion by 2024, up from simply $1.9 billion in2018 The projection didn’t break out the split in between hemp and non-hemp products. And the bad news is that the rosy outlook for CBD does not suggest the chance is going to equate into considerable development for Aurora.
That’s since Aurora will not only be competing with other U.S. companies for market share, but with Canadian pot stocks that are likewise looking to take benefit of the opportunities in the hemp market.
Julie Lerner, who is CEO of the PanXchange where hemp is traded, validated in January that there was much more supply than need for hemp. She expects list prices to come down as a result of all the competition. That’s not going to bode well for a business like Aurora, which is trying to enhance on its margins and get closer to success.
Having access to thousands of places doesn’t ensure development
In the news release announcing the acquisition of Reliva, there wasn’t a whole lot of details on how big of a gamer the business is in the hemp market. Aurora referred to Reliva as “a leader in the sale of hemp-derived CBD items in the United States,” there wasn’t anything to quantify or justify that other than to state that its products were sold in more than 20,000 U.S. areas.
Hemp-derived CBD business Charlotte’s Web ( OTC: CWBHF), sells its products in less areas, and it has far stronger sales.
A year earlier, the company tape-recorded sales of $217 million when its products remained in more than 6,000 locations. The boost in areas over the past year hasn’t led to a rise in sales for Charlotte’s Web, and Aurora investors shouldn’t make the error of assuming more areas imply greater revenue. If there are only minimal products offered, or the inventory isn’t moving, the number of retailers carrying the items might not indicate much for the company’s top line.
The relocation does not make Aurora a much better buy
Aurora expects Reliva to assist the Alberta-based pot producer inch more detailed to accomplishing a favorable adjusted incomes prior to earnings, taxes, depreciation, and amortization (EBITDA) figure. The acquisition may help play a small part in enhancing Aurora’s bottom line, however the business still has a lot of work to do in improving its financials.
The only certainty, it seems, is that the offer will lead to more dilution for investors. The companies prepare for the offer will close in June, and it will cost Aurora as much as $45 million in shares.
The acquisition is a modest one for Aurora that will assist add to its top line, however that’s about it; Aurora stays a risky buy, and one quarter and one acquisition isn’t going to alter that. The pot stock is still down more than 80%over the past 12 months, notably worse than the Horizons Cannabis Life Sciences ETF ( OTC: HMLSF), which has fallen by 60%.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Charlottes Web Holdings. The Motley Fool recommends Charlotte’s Web. The Motley Fool has a disclosure policy.”>