Enthusiasm for marijuana shares is at a full-time elevation, and that buzzer has enabled Aurora Cannabis (NYSE: ACB) to expand the business with a mind-raising pace. As a result, the marijuana producer has a large share of the Canadian market for legal cannabis, rapidly growing international business and a billionaire activist investor on the payroll.
Aurora Cannabis will soon be able to grow 700,000 kilograms of marijuana annually at a per-gram price that its big name competitors cannot match. Hiring billionaire activist Nelson Peltz as senior adviser could inspire Coca-Cola to return to the business table or another fortune 500 companies to take a chance.
Aurora can produce half a million kilograms of cannabis per year and production can exceed 700,000 kilograms by 2020. Auror's fancy automated greenhouses have lower labor costs than most of their peers, which could give the company a long-term advantage in a crowded market .
How Peltz could make Aurora even better
If Nelson Peltz was in control of Aurora's board, there is an overall change that he would probably do – and it is to conclude a growth-cost strategy that has created an infinite string of investments made with money that the company does not have. Whistler Medical was probably a wise addition, but spending heavily on building business in 24 countries on five continents in a few years, most likely it won't work for long-term investors to kill Aurora's toes right now.
Although the stock has risen 1,940% over the past three years, its market share has decreased by 15,840% over the same time frame to $ 9.07 billion. Producing a similar return from the latest prices would require the company's market space to be at least $ 175 billion in a few short years, which would make Aurora about twice as valuable as General Electric is today.
Aurora completed 2018 with $ 205 million in cash and securities, which means another capital increase is just around the corner unless the demand for legal cannabis skyrockets in the first quarter while prices stop or improve.
Why Peltz Will Not Get Its Way
A Rolodex full of potential new partners and a dignity are the main reasons why Aurora is willing to pay Peltz up to 620 million Canadian dollars for advisory services. So far, the activist and the fund he managed have not revealed any investment in Aurora Cannabis beyond Peltz's time and reputation.
Activist investors all follow the same basic formula that means buying shares that are underperforming and trying to raise them in ways that their associated management teams do not agree with. Without any voting rights, Peltz will not stop Aurora from making extremely risky investments.
Aurora's taken what looks like a strong position in new markets trying to get its government-known medical-marijuana programs off the ground. While Germany tends to pay a much higher cost per gram, it is also the strictest EU member in terms of cannabis. Prosecutors generally cannot charge anyone with holdings less than 7.5 grams, and anyone can cultivate it for personal use as well. In Spain, you can grow cannabis on private property as long as it is consumed by adults in privacy, leading to dozens of non-profit Cannabis Social Clubs operating as marijuana stores.
The enthusiasm of the stock market knows no bounds, but the odds for Aurora are large enough to give outstanding profits from the current starting point is narrow. Sales, general and administrative expenses amounted to $ 66.3 million over the last three months of 2018. During that time, the company reported a gross profit of just $ 32 million. With social clubs and their counterparts across the EU working with less concern than Canada's illegal market, it will be difficult to maintain wide profit margins on medical marijuana in the region.
In the last three months of 2018, Aurora reported a net loss of $ 240 million and a massive $ 405 million loss once you report fluctuating prices for other marijuana shares it owns. In the Aurorian home market, cannabis prices are contracting and Aurora can only trim so much from the sales cost per gram that reached $ 2.60 in the last three months of 2018. This means that investors can expect further losses in the future.