The enthusiasm for marijuana stocks is at the highest levels, and that buzz allowed Aurora Cannabis (NYSE: ACB) to expand operations at a pace of mental turnaround . As a result, the marijuana producer has a large share of the Canadian legal cannabis market, rapidly expanding international operations and a billionaire active investor on the payroll.
Aurora Cannabis will soon be able to grow 700,000 kilograms of marijuana each year at a price per gram that its big name competitors cannot match. The engagement of the billionaire activist Nelson Peltz as senior councilor could inspire Coca-Cola to return to the table of agreements or another fortune 500 company to seize the occasion .
Aurora can produce half a million kilograms of cannabis per year and production could exceed 700,000 kg in 2020. Aurora's automated greenhouses have lower labor costs than most of its peers, which could give the company a long-term advantage in a crowded market.
How Peltz could make Aurora even better
If Nelson Peltz had control of Aurora's Board of Directors, there would be a general change that he probably would have made – and this is to put an end to growth in any strategy cost which has created an endless series of investments made with money that the company does not have. Whistler Medical was probably a wise addition, but spending a lot to build operations in 24 countries on five continents in a few years probably won't work for the long-term investors who are diving in Aurora right now.
has risen 1.940% over the past three years, its capitalization has increased by 15.840% over the same time period to $ 9.07 billion. Producing a similar return from recent prices would require the company's capitalization to reach at least $ 175 billion in a few years, which would make Aurora twice as valuable as General Electric today.
Aurora finished 2018 with $ 205 million in cash and securities, which means that another capital increase is just around the corner, unless demand for legal cannabis skyrocketed in the first quarter while prices remain or improve.
Why Peltz will not come
A Rolodex full of potential new partners and an air of dignity are the main reasons why Aurora is willing to pay Peltz up to 620 million Canadian dollars for consulting services. So far, however, the activist and the fund she manages have revealed no investment in Aurora Cannabis beyond Peltz's time and reputation.
Activist investors all follow the same basic formula that consists of buying stocks that are underperforming and try to increase them in a way that is not agreed with their associated management teams. Peltz has no intention of preventing Aurora from making extremely risky investments.
What's new again
Aurora has taken what looks like a strong position in new markets trying to get government medical marijuana programs off the ground. While Germany tends to pay a much higher cost per gram, it is also the most severe member of the EU when it comes to cannabis. In general, prosecutors cannot charge anyone with less than 7.5 grams and anyone can also cultivate it for personal use. In Spain, cannabis is allowed to be cultivated on private property as long as it is consumed by adults in private, which has given rise to dozens of non-profit social cannabis clubs that function as marijuana shops.
The enthusiasm of the stock market knows no limits, but the chances of Aurora becoming large enough to provide exceptional gains from its current starting point are scarce. Selling, general and administrative costs reached US $ 66.3 million in 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 operating with less concern than Canada's illicit market, it will be difficult to maintain large profit margins on medical marijuana in the region.
During the last three months of 2018, Aurora reported a net loss of CA $ 240 million and an overall loss of CA $ 405 million once they realized the fluctuating prices of other marijuana stocks they owned. In the Aurora domestic market, cannabis prices are contracting and Aurora can only cut the cost of sales per gram which reached $ 2.60 in the last three months of 2018. This means that investors can expect further losses.