It’s easy to be down on a stock like Aurora Cannabis (NYSE:ACB). The stock has fallen more than 60% in the past 12 months, while the S&P 500 is up 18% over the same period. The company continues to issue more shares, and is struggling to grow and stay out of the red. But for one analyst from GLJ Research to suggest that the stock is worth zero…
seems extreme, even if you’re really bearish on pot stocks.
The stock has shown signs of life lately, coming off a fantastic month in November when it rallied close to 190%. Below, I’ll take a look at whether this is the start of a new, more positive trend for Aurora or if it really is in danger of going to zero and investors should jump ship.
A $0 price target is more attention-grabbing than it is realistic
To say that a company is worth zero would suggest its assets have next to no value — certainly not enough to cover its liabilities. And while you could discount items like intangible assets and goodwill, where valuations can sometimes heavily rely on estimates, Aurora would still have assets totaling 1.4 million Canadian dollars remaining as of Sept. 30 — more than double the CA$603,000 it listed in total liabilities as of that date. The company has far more assets than it does liabilities, and it’s far from worthless.
Setting a price target of zero is a great way to grab headlines and get people talking about the possibility of the stock going on more of a decline, but the arguments for the price target aren’t terribly compelling. There were two main reasons the analyst gave for the valuation: (1) that Aurora’s recent rise in price gave short-sellers an opportunity to take on greater short positions (which would push its price down), and (2) that Aurora’s strategy isn’t working and has been reset multiple times. But many top-performing stocks have short-sellers: Tesla‘s Elon Musk is known for battling short-sellers. With the automaker’s stock up 780% in 12 months, it’s fair to say he’s been winning that war in spades.
As far as strategy goes, Aurora isn’t the only cannabis company struggling. When rival Canopy Growth fired its CEO Bruce Linton last year, there was hope that a greater focus on costs and the bottom line would make the company more investable. However, it’s continued to incur losses, staying firmly in the red in each of the past four quarters.
The company still faces challenges and is currently in a “transition year.” The one advantage Canopy Growth has over Aurora is that it’s backed by beverage magnate Constellation Brands, giving it more resources to tap into should it need help.
Aurora is struggling, but so are other Canadian pot stocks. Seriously changing course is necessarily a sign of business failure, especially in a relatively new industry like marijuana — recreational use of the drug has only been legal in Canada since October 2018.
Will its rally continue?
On the flip side of things, investors may be wondering if Aurora’s stock could continue rising and building off of last month’s strong rally. I’m less optimistic about this because the main catalyst for Aurora and…
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