When Canada legalized adult uses of cannabis in late 2018, investors rushed to buy shares of what looked like the most promising companies in the field. Aurora Cannabis(NASDAQ: ACB) was one of the most prominent.
However, like the rest of the cannabis industry, Aurora Cannabis has been a disappointment over the past few years. Just how much of a disappointment? Let's find out how much a $5,000 investment in Aurora Cannabis five years ago would be worth today and whether it's worth investing in the stock today.
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There'd be just pocket change left
First, let's find out what happened to Aurora Cannabis. Some of the company's problems were not exactly of its own doing. For instance, though it became legal to sell weed in Canada, companies had to acquire the proper licenses to open retail stores. The process was extremely complicated, especially considering the number of companies that saw the potential and decided to dip their toes in this market.
Besides the brutally competitive nature of the industry, illegal channels also remained alive and well in the country, creating even more competition for Aurora Cannabis and its peers. The pot grower had troubles of its own, though. It failed to secure a partner with big pockets to help it fund growth, and it chose to aggressively expand its footprint by acquiring smaller companies. The company largely financed its acquisitions by issuing new shares and diluting existing shareholders.
That, combined with the industrywide problems Aurora Cannabis encountered, led to inconsistent revenue, consistent net losses, and a horrendous stock market performance. Those who put $5,000 in Aurora Cannabis five years ago would have a paltry $27.80 left.
Don't bet on a major bounce back
Should longtime investors give up on Aurora Cannabis, and should prospective investors take their money elsewhere? On the one hand, at a price of less than $0.40 per share, the stock could deliver outsized returns if there were a bright future. And if the past isn't a guarantee of what will happen in the future on the stock market, there is at least some hope that Aurora Cannabis can turn a new page. After all, Apple almost went out of business in 1997.
Investors who stuck with the company since then are delighted that they did. However, Aurora Cannabis is no Apple: There is very little reason to think the pot grower can reverse course.
First, the problems it faced in the Canadian cannabis market largely remain. Aurora Cannabis has tried to diversify its revenue base and now generates significant sales from its medical cannabis business, which operates in Canada and various countries abroad.
In the second quarter of its fiscal year 2024, ended Sept. 30, Aurora Cannabis's revenue increased to 63.4 million Canadian dollars ($47 million), up 30% from the year-ago period. That's good progress, and Aurora Cannabis intends to achieve positive free cash flow this year.
Whether the company hits this goal, there is one problem with Aurora's switch: The medical cannabis market is much smaller than the recreational one, and with all the struggles in the recreational market, pot companies are crowding into the medical market.
In other words, Aurora Cannabis's prospects look limited as it turns to a smaller market that is likely to be just as competitive as the recreational market, which is why the stock market hasn't significantly rewarded its shift in strategy. In my view, Aurora Cannabis is likely destined to fade into irrelevance. Those who invest in the stock today could end up with worthless shares somewhere down the line. For investors who already own the company's shares, it's best to cut losses and leave.
Yes, even for those who invested $5,000 in the stock five years ago. Having $27.80 left out of $5,000 isn't great, but having nothing left at all would be even worse.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
