As the novel coronavirus continues to disrupt economies across the globe, the stock market’s reaction has been both remarkable and unprecedented. Investors scrambled to find an ounce of stability in the cannabis industry, specifically in Aurora Cannabis (NYSE:ACB) stock. While the company has a cult following, it is well-known for generating net losses.
Last week the Canadian pot producer piqued the interest of investors when it announced its acquisition of CBD platform, Reliva, and subsequent entry into the U.S market.
Aurora Enters the World’s Largest Cannabinoid Market
Aurora stock started the year on a bad note and lost almost 90% of its stock market value in the last 12 months. This was worsened by problems across the industry as a result of the pandemic.
With its share price close to $1, the company stood to lose its listing on the NYSE. However, things took a turn for the better when Aurora announced its acquisition of Reliva, a massive CBD platform in the United States.
On Wednesday, May 20, Aurora stock closed 13% lower and the acquisition deal was announced later that day. The stock saw an immediate increase in its price in the hours post-trading and by 2:50 PM the next day, its value was up by 28%. As of this writing, it is currently around $15.45.
An All-stock Deal
Given Aurora’s weak financials, the acquisition of Reliva is a well-positioned and strategic move on their part. “It’s immediate access into the world’s largest cannabinoid market.” the company’s CEO, Michael Singer said in an interview with CNBC.
Their entry into the U.S. market hopes to make up for the lower than expected sales in Canada after the legalization of marijuana in October 2018.
As part of the acquisition, Reliva’s stakeholders will receive $40 million in shares, which remain quite valuable considering Aurora’s low quarter-over-quarter loss. Aurora is also expected to take over Reliva’s outstanding membership interests that it hopes to translate to profitable partnerships. In addition to the all-stock deal, there is also a possibility of a $45 million payout in cash or Aurora shares over the next two years. However, this is contingent on Reliva meeting certain financial targets.
The deal is expected to close in June 2020 and given the value of the acquisition, analysts predict that there will be an immediate impact on Aurora’s EBITDA. An adjustment of the current numbers will result in a profitable Q1 in 2021.
The company plans to “capitalize on each company’s market leadership and sales infrastructure to drive higher revenue growth” according to Aurora’s CEO.
The deal gives Aurora access to 20,000 retail locations and distributors across the U.S. This acquisition could not come at a better time as the CBD market in the U.S is predicted to hit a value of $2.4 billion by 2025.
Positive Q3 Results for Aurora Cannabis
If you’re still on the fence about investing in Aurora’s stock, despite their acquisition of Reliva, the company’s positive Q3 results may be just the confidence-booster you need. After the markets closed on May 14, the company released its Q3 earnings report, which showed some promising signs.
Aurora had a 34% increase in sales when compared to the second quarter along with a 35% increase in net revenue at $75.5 million CAD. While the company was still unprofitable and reported a loss of $50.9 million CAD, this was still lower than the $80.2 million CAD loss in Q2.
However, the company is still rife with problems like a high operating expense at $111 million CAD and a significant amount of goodwill on its balance sheet. The acquisition of Reliva is expected to improve its bottom line and push Aurora’s numbers into the green.
A Booming Industry
Aurora Cannabis is well-poised to meet (and hopefully beat) industry expectations in 2021. The legalization of cannabis is spreading like wildfire in the U.S and shows no signs of slowing down. Eleven states in the U.S have legalized recreational marijuana and contribute $52 billion in sales to the U.S economy. Analysts predict that the industry’s net worth could be equivalent to the GDP of 9 states by 2022.
With widespread access in this high-growth industry, Aurora Cannabis’ entry into the U.S market also pushed its enterprise valuation to $1.65 billion. This makes it the third most expensive Canadian pot stock behind Cronos Group (NASDAQ:CRON) and Canopy Growth (NYSE:CGC).
But despite its high valuation, the company plans to keep prices the same because it believes the value of affordability remains an important factor when dealing with a mass retail market like the U.S.
The Bottom Line on Aurora Stock
Initial numbers predicted a bleak future for Aurora stock, but the acquisition of Reliva is an encouraging sign for investors. In the U.S, the lockdown resulted in a surge in marijuana demand and Aurora Cannabis’ timely entry puts it in a great position to benefit from this.
With positive Q3 results, a valuable acquisition and access to a high-growth U.S market, there’s no better time to buy this pot stock.
As of this writing, Divya Premkumar did not own any of the aforementioned stocks.