Is Aurora Cannabis the Best Pot Stock to Buy Now?

Plagued by oversupply, inventory issues, store closures due to COVID-19, and restructuring woes, shares of Aurora Cannabis (ACB) have suffered. The stock has fallen by nearly 90% in the span of a year, leaving many investors disappointed by what they once thought would be a high flyer. In fact, the company had to perform a 12-1 reverse stock split in May just to stay listed on the stock exchange. Many investors are now asking: “Will there ever be light at the end of the tunnel”…

Warren Buffett once said: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” More often than not, heavy sell-offs create opportunities for courageous investors to buy stocks at rock-bottom prices and sell them at a higher price once the underlying business recovers. Today, let’s look at why Aurora is a top pot stock that is trading at an enticing valuation. 

A recovery on the horizon

Aurora’s biggest problem is its inability to accurately predict supply and demand dynamics in the Canadian pot sector. For example, the company has invested in multiple facilities that can collectively produce up to 150,000 kilograms of cannabis each year. However, in the third quarter of 2020, Aurora only sold about 13,000 kilograms of cannabis, amounting to an annual run rate of just 52,000 kilograms.

These problems are temporary and will likely be mitigated as the industry expands and demand picks up. In the third quarter ended March 31, Aurora’s net sales were 78.4 million Canadian dollars, an increase of 18% compared to the second quarter of 2020. At the same time, the company’s quarterly cash use decreased by about 43% compared to last year, to CA$154.6 million. The company still has about CA$230.2 million in cash to offset its losses from operations, though it may need to raise cash by the end of the year to stay afloat.

As economies around the world reopen, rebound in retail cannabis sales will be a significant driver of Aurora’s growth going forward. Last November, the company opened its 11,000 square-foot flagship store in West Edmonton Mall, the biggest shopping mall in North America.

Additionally, the company is on track to achieve several ambitious goals. First, Aurora is projecting positive earnings before interest, taxes, depreciation, and amortization (EBITDA) by the first quarter of 2021. Second, the company anticipates keeping its adjusted gross margin above 50%. Third, Aurora’s selling, general, and administrative expenses are expected to decline to between $40 million to $45 million next quarter as the company lays off employees and shuts down some of its offices. Finally, the company’s capital expenditures will likely fall to under $25 million in the fourth quarter of 2020.

Will Aurora’s stock rebound?

As of now, Aurora Cannabis is trading for roughly four times price-to-sales. If the company’s production gap narrows, however, and achieves 150,000 kilograms per year in the amount of cannabis sold, then Aurora would become significantly undervalued. Assuming the company sells this amount of cannabis at a current price of CA$4.33 per gram, Aurora may bring in as much as CA$649.5 million per year in revenue. In this scenario, the company’s price-to-sales valuation would be a meager 2.5.  

In May, monthly sales in the Canadian cannabis market grew by 116% year over year, to CA$185.9 million, according to Statistics Canada. Hence, I think Aurora can sell what it harvests within a couple of years.

Also in May, Aurora acquired… 

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