Once investor favourite cannabis stock Aurora Cannabis (TSX:ACB)(NYSE:ACB) has dug a deep hole in investors’ pockets this year. What’s even more concerning is that its recovery does not seem in sight. The pot stock could continue to trade muted or weak, at least in the medium term, awarding no respite to investors.
Aurora Cannabis stock continues to underperform
Aurora Cannabis stock created a solid fortune for investors during the early days of cannabis advent. It rose almost 1,500% during 2016 and 2018. However, it was even quicker to lose sheen. It has lost more than 95% of its value from its all-time high in Q4 2018. It has lost 20% so far in 2021 and 37% in the last 12 months.
The once hot pot stock has been struggling on the revenue growth front for long. Aurora’s revenues from the recreational segment, which offers significant growth prospects, have been on a decline for the last few quarters. Forget net profits; the company has missed its guidance to turn EBITDA positive for the last couple of quarters.
And it’s not an industry-wide trend. Many cannabis players have seen consistent revenue growth in both medical and recreational segments. Peer Canopy Growth (TSX:WEED)(NYSE:CGC) exhibited a decent revenue growth of 37% year over year in the last 12 months. Canopy Growth stock has risen more than 25% in this period.
One thing that led to Aurora Cannabis’s decline has been its rising costs. While the company focused on ramping up its production, the operational inefficiencies dented its financials.
Challenges and growth opportunities
Aurora has issued a substantial amount of new equity shares in the past to raise capital. In 2016, the number of its total outstanding shares stood at 10.75 million, while it has ballooned to 194 million at the end of June 2021. Every time a company issues new shares, its existing shareholders’ ownership gets reduced, making each share less valuable.
The U.S. market legalization and emerging cannabis derivative market pose appealing growth prospects for cannabis players. Some of the bigger players with deep pockets, like Canopy Growth and Tilray (TSX:TLRY)(NASDAQ:TLRY), could be at an advantage to play these growth opportunities in the next few years.
Tilray seems an attractive bet for long-term investors, mainly after its merger with Aphria. Just before the merger, Aphria ensured its entry into the U.S. beverage market by acquiring SweetWater Brewing. With this buyout, it created a market for high-growth cannabis derivatives in the U.S. for itself.
Aphria also stands tall on the operating profitability front and has reported positive EBITDA for the last seven consecutive quarters. Also, its large geographically diversified presence should bode well as adult use of cannabis increases in the next few years.
ACB stock versus its peers
Notably, Aurora’s current valuation does not indicate encouraging prospects against its historical trends. It is trading eight times its sales, which is lower than Tilray’s 10 and Canopy Growth at 20. However, a bleak outlook for its top-line growth might keep investors at bay. Tilray and Canopy Growth have relatively better financial and stronger balance sheets, which deserve a valuation premium.
Aurora Cannabis stock could drive higher in the very long term, given its production capacity and diversified operations. However, it involves huge opportunity costs. Peers offer a smarter risk/reward proposition for investors at the moment.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni does not hold any position in the stocks mentioned.