Monday, 13 May 2024

Could the Biden Administration’s Latest Move Send Aurora Cannabis Stock Soaring?

by BD Banks

Thus far, 2024 has been an exceptional year for Aurora Cannabis (NASDAQ: ACB) stock. Up more than 40%, it’s been generating some impressive returns for investors. And recent developments involving rescheduling marijuana in the U.S. has gotten investors even more bullish about the stock and its long-term prospects.

Could the Biden Administration’s latest move, to reclassify marijuana as a Schedule III substance, from its current Schedule I status, lead to even greater returns for Aurora Cannabis investors?

Why Aurora might be an underrated stock

News relating to marijuana reform often generates excitement in pot stocks. And with Aurora being one of the more recognizable names in the industry, it can attract the lion’s share of the interest. On April 30, the day investors learned about the Biden Administration’s plans to reschedule cannabis, Aurora’s stock closed a mammoth 46% higher than the previous day. Since then, it has given back a lot of those gains, but it’s a good gauge of how popular the stock can be when there’s positive news related to cannabis.

Rescheduling cannabis is a sign that the U.S. government finally acknowledges that there are some potential positive uses for the substance. Under Schedule I, substances have “no accepted medical use” per the Drug Enforcement Administration’s classification system. Reclassifying cannabis as a Schedule III substance may potentially lead to some form of medicinal marijuana becoming acceptable in the U.S. in the future.

Now, it’s important to know that is by no means inevitable — but it is a step in the right direction. While other Canadian cannabis companies are hopeful that the recreational market will open up in the U.S., a more modest step would be approval of the medicinal market. And in recent years, Aurora has been pivoting more toward medical marijuana, where margins are higher.

If rescheduling of cannabis proves to be a first step in further marijuana reform, Aurora may be one of the better-positioned Canadian pot stocks to benefit from such a development. It has been reducing the scale of its operations to become leaner, while also focusing on the medicinal market — which would likely be legalized before the recreational market.

At this stage, it’s still a long shot, but Aurora could again be a hot pot stock to buy if further reform takes place.

But Aurora’s business remains very risky

Aurora may be an attractive play for contrarian investors who are hopeful that further marijuana reform will come in the U.S. But the problem is that the company’s operations aren’t sustainable, and the business may not be around should the day finally come when the U.S. pot market becomes accessible for Aurora.

In the company’s most recent earnings report, for the last three months of 2023, Aurora incurred a net loss of 25.6 million Canadian dollars. It did post a profit, but that was on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis.

The company is still burning through cash, but it expects that it will achieve positive free cash flow during the current calendar year. But even if it does, it may not be generating enough cash to reinvest in its operations to help facilitate growth. While the company’s net revenue of CA$64.4 million did grow at a rate of 5% last quarter, it was also going against a soft comparable. And generating consistent growth has been a problem for Aurora in recent years as it has been tightening up its operations.

With its future growth questionable, the company remaining unprofitable, and the business still burning through cash, there’s plenty of risk with Aurora’s stock.

Investors shouldn’t expect a long-term rally from Aurora

Aurora can be a very volatile stock to hold in your portfolio. It could surprise with a big bump in price based on cannabis-related news, but its fundamentals need a lot of work before it starts attracting a lot of growth investors again.

Even if you’re bullish on marijuana reform, this is not a slam-dunk buy. Legalization in the U.S. may not come anytime soon, and even if you’re optimistic about it, it could take years. While Aurora has been making efforts to improve its business, there’s still too much risk with the stock to just put it in your portfolio, forget about it, and hope that it ends up proving the critics wrong.

The stock has lost more than 90% of its value in the past three years, and while I would be surprised if it were to do as badly over the next three years, investors should also be careful to assume that it has bottomed out.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.