The cannabis space is a quickly emerging one that is drawing quite a bit of attention from the investing community. As markets emerge, we tend to see massive gains in valuation, and that has been the case, for the most part, in the cannabis space. However, one of the largest cannabis companies on the market today, Aurora Cannabis Inc (NYSE: ACB) seems to be lagging compared to its peers.
No matter what metric you look at, ACB is undervalued in comparison to any of the big four cannabis stocks. Now, the big question is, “Does this mean that the stock’s a dud or a compelling opportunity for future growth.” In my opinion, the latter is the case. Here’s why:
ACB Is Highly Undervalued No Matter What Metric You Look At
It’s easy to say that a stock is undervalued, but to prove it, well, that’s not always as simple. However, when it comes to Aurora Cannabis, the proof is in the pudding. Just look at its metrics in comparison to its peers.
- Trailing 12 Months Sales/Price – When it comes to the other three, in the four big pot stocks, Cronos (CRON), Canopy Growth (CGC), and Tilray (TLRY), we see a market cap that is at or above tripple digit sales multiples. In the case of ACB, the stock trades at about 60 times trailing sales.
- 12 Months Ahead Sales/Price – When compared to one-year projected sales ahead, the other three in the big 4 pot stocks trade around 20 to 30 times sales expectations. ACB trades at just over 10 times sales projections.
- Net Revenue/Market Cap – Other players like CGC are currently trading at about 60 times the annualized net revenue reported in the last quarter. Aurora Cannabis trades at about 35 times last quarter’s annualized net revenue.
- Kilogram Sales/Market Cap – Finally, at Canopy growth, the market cap represents about $1.6 million for each kilogram of cannabis sold in the last quarter. In the case of ACB, the stock is valued at about $1 million per killogram sold in the last quarter.
At first glance, you may think that the difference here has to do with scale. However, that couldn’t be further from the truth. The reality is that ACB is the second largest cannabis company in the world by market cap. Moreover, the company controls around 20% of the adult use cannabis market in Canada and has about 500,000 kg per year in funded capacity.
Why Is ACB So Heavily Undervalued
If Aurora Cannabis’ valuation doesn’t have to do with scale, capacity, or profits, what’s the deal? Well, the truth of the matter is that it has to do with balance sheet. With about $110 million in cash on hand, things seem pretty good. However, in the grand scheme of things, that’s pennies.
The truth of the matter is that others in the big four have attracted large investments from big names. As a result of these invesmtents, CGC has $3 billion on its balance sheet. CRON is sitting with around $2 billion. So, ACB and its $110 million is just a drop in the bucket when it comes to cash on hand, but why does this matter?
In emerging markets, companies that make investments today are going to reap the rewards tomorrow. At this stage of the game, acquisitions and investments in becoming a leader is increasingly important. With just $110 million on the books, ACB simply can’t compete with investments made by CGC or CRON. It’s my belief that this painful reality is what has been holding Aurora Cannabis back from reaching a more reasonable valuation.
ACB Intends On Solving This Problem
On April 3, 2019, Aurora Cannabis took a bit of a dive in the market after filing a prospectus with securities regulators in order to raise up to $750 million. The capital raise will happen over the course of 25 months through share sales, debt, and other offerings.
When announcing the move, ACB announced that the capital raised as a result of the prospectus will be used toward its “global expansion and partnering strategy.” In a statement, Michael Singer, Executive Chairman at the company, had the following to offer:
With our recent listing on the NYSE, our successful financing in January 2019 led by U.S. institutional investors, and as we work with Nelson Peltz to explore potential partnership opportunities, this filing is a natural evolution for our company as we rapidly mature into a global and profitable organization.
At the end of the day, it seems as though Aurora Cannabis is getting tired of waiting on a big player to come along and make a large investment. So, the company is reaching out to get the funds they need in order to maintain their position as a leader in not just the Canadia, but the global cannabis market.
What I’m Expecting To See Moving Forward
Moving forward, Aurora Cannabis investors have quite a bit to look forward to. First and foremost, with the company raising capital, it will be able to stand against the other big players in the cannabis space when it comes to investments.
As a result, I’m expecting that we will see various updates surrounding the capital raise and what the money is being used for. In particular, I’m expecting to see acquisitions in various regions around the world. Moreover, I’m expecting that the aggressive work the company has been doing to continue.
Let’s not forget, earlier today, the company announced big news with regard to its European efforts. According to the press release, the company hasn’t only been selected by the German Federal Institute for Drugs and Medical Devices as a producer, it was given the largest production capacity.
Through a public tender to cultivate and distribute medical cannabis in Germany, 79 companies applied to become a medical cannabis producer in the region. These 79 companies were competing for a total of 13 lots in the tender. The German regulatory authority looked at facility design, quality, security and logistics and other factors when making their decions.
For ACB, the result couldn’t have been better. The company was awarded the maximum number of lots in the tender offer. So, it will now be in charge of 5 of these lots over a period of four years. It is expected that the minimum supply from these lots will be 4,000kg at a minimum in total.
In a statement, Neil Belot, Chief Global Business Development Officer at ACB, had the following to offer:
We are very proud to have been selected as one of only three companies by the German government, which is a great achievement by our team. Having the highest rated concept is a strong validation of the Aurora Standard cultivation philosophy, as well as of our track record in the delivery of safe and high-quality medical cannabis products to the German system.
We commenced delivering dried cannabis flower from Canada to the German market in 2017, and recently added cannabis extracts to our offerings for German patients. Winning the tender reflects a natural evolution for Aurora, establishing a more prominent local footprint in this important international market with over 82 million people.”
While the European efforts that the company has been making have proven to be fruitful, I believe that this hails in comparison to what is coming up. In fact, in the most recent earnings report, the company mentioned the United States market, a market that’s believed to be the one with the most potential. In fact, the company said in the report that it is…
…very well versed in the hemp industry and will enter when it’s proper to enter and when it’s legal to enter into the United States market.
Investors have been waiting for ACB to make a move into the United States market since the Farm Bill of 2018 passed, opening the door to CBD sales in the region. The problem is likely a financial one. At the end of the day, with only $110 million in cash on hand, there’s not much room for acquisitions of companies already established in the United States, or for investing to establish a footprint in the region.
Nonetheless, the $750 million fund raise changes that. If all goes well, $860 million will be plenty of money to make a strong entrance into the United States market. In my opinion, a move like this would open the eyes of investor, leading to the company trading toward a more comparable valuation.
While the recent fund raise from Aurora Cannabis proved to be a shocker for many, the truth of the matter is that it was a very smart move. The only thing holding the company’s valuation back seems to bee the lack of cash on the balance sheet.
With the cash raised, the company will have the funds it needs to compete with other large players in the space, solidifying its position as a leader in the global cannabis market. This will not only open the door to continued growth in the regions in which the company already works, but it will likely lead to the company’s entrance in the United States market.
With a stock that is clearly undervalued, a global footprint that is largely unmatched in the cannabis space, and a likely entrance in the United States market relatively soon, I believe that ACB stock represents a compelling opportunity!
What Do You Think?
Where do you think ACB is headed moving forward? Join the discussion in the comments below!